![]() No strategy assures success and all investing involves risk, including loss of principle. By adhering to a well-structured investment plan, we help our clients avoid making emotional decisions and maintain their focus on the bigger picture throughout different market environments. We can proactively reposition actively managed portfolios by adjusting holdings, engaging in tax loss harvesting, and rebalancing when appropriate. We remind our clients that markets have historically increased over time despite frequent drawdowns, and that a long-term viewpoint is paramount to take advantage of the power of compounding. Our investment process emphasizes a long-term mindset as we seek to capitalize on the benefits of diversification and the power of compounding. Please note that there is no guarantee that financial planning will help you reach your goals. Financial planning is a tool intended to review your current financial situation, investment objectives and goals, and suggest potential planning ideas and concepts that may be of benefit. Based on the output of the financial plan, our investment management process designs a well-diversified portfolio constructed with a long-term methodology based on prudent risk management, asset allocation, and security selection. The financial plan helps define cash flow needs, seeks to optimize account structures, considers tax mitigation strategies, and determines the appropriate asset allocation based on the client’s willingness and ability to take risk. ![]() Revised July 2023 – originally posted July 2022Īt Winthrop Wealth, we follow a Total Net Worth Approach to wealth management that combines both comprehensive financial planning and investment management. The approach also has potential for asset allocation, portfolio theory and risk management applications.By Andrew Murphy, CFA | Co-Chief Investment Officer The obvious next step is to develop the approach described above to formulate trading strategies based on sign forecasting in a universe of several assets, possibly trading binary options. ![]() Further tests are required to determine whether the failure of the strategy to produce an exceptional performance on par with 1995 was the result of normal statistical variation or due to changes in the underlying structure of the process requiring model recalibration. ![]() Even though the strategy out-performed the Index by a substantial margin of 6%, the performance in 2005 is of concern as market volatility was very low and probabilities overall were on a par with those seen in 1995. The under-performance of the strategy in 2003 is explained by the fact that direction-of-change probabilities were rising from a very low base in Q4 2002 and do not reach trigger levels until the end of the year. The compound annual return is 22.63%, with an annual volatility of 17.68%, alpha of 14.9% and Sharpe ratio of 1.10. In terms of overall performance, the model enters the market in 113 out of a total of 241 months (47%) and is profitable in 78 of them (69%). The strategy performs exceptionally well in 1987, 19, when the ratio between expected returns and volatility remains close to optimum levels and the direction of the S&P 500 Index is highly predictable, Of equal interest is that the strategy largely avoids the market downturn of 2000-2002 altogether, a period in which sign probabilities were exceptionally low. In this test we make no allowance for market impact, or transaction costs.Īnnual returns for the strategy and for the benchmark S&P 500 Index are shown in the figure below. We assume that the position is held for 30 days and rebalanced at the end of each period. ![]() To illustrate some of the possibilities of this approach, we constructed a simple market timing strategy in which a position was taken in the S&P 500 index or in 90-Day T-Bills, depending on an ex-ante forecast of positive returns from the logit regression model (and using an expanding window to estimate the drift coefficient). There is a follow-up article from 2006 in which Christoffersen, Diebold, Mariano and Tay develop the ideas further to consider the impact of higher moments of the asset return distribution on sign predictability and the potential for market timing in international markets (download here). ![]()
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