As investors, we often don’t think about what weight each instrument should have within our portfolio. Should I have more stocks or more bonds? Should this stock have a bigger weighting than that stock? It’s a complicated question and it doesn’t have a single answer, the weights are always changing. For example, if you buy a stock and it goes up in price, should you sell it? Or should you buy more? If you own something that is highly volatile, like a commodity fund, should you reduce the weight for fear that a big downturn could wipe out the profit from the rest of your portfolio?
Choosing weights for assets is arty’s superpower. arty has years of historical data to review and can see the likely outcome of each action given previous experience. arty will use this research to tell you what weight to choose, when to change it and by how much. arty runs this equation every month, and this is how it works…
The primary aim of choosing weights and then rebalancing them is to control the volatility. Warren Buffet’s first rule of investing is “don’t loose money!” and his second rule of investing is “don’t loose money!”. The volatility of your portfolio indicates the likelihood of loosing money and arty does not let people take more risk than they are comfortable with. For each portfolio there is a targeted volatility and arty achieves that volatility each month in two ways.
- reducing the weight of more volatile assets and increasing the weight of less volatile ones,
- substituting out correlated assets and substituting in uncorrelated assets.
By doing this arty ensures that the realised volatility of your portfolio matches the target volatility and therefore the probability of sustaining a loss over the course of one year is not higher than you are comfortable with. For example, the probability of sustaining a loss greater than 10% after one year for the Preservation portfolio is 0.2%. This way you can rest assured that your money will still be there when you need it.
The secondary aim of rebalancing the weights is to maximise returns. Once the volatility is in line with expectations, arty can set about the task of maximising profit. This is where arty’s historical knowledge is helpful. Every month arty has to choose a path, and every month arty remembers if that turned out to be the best path or if there was another path that could have been better. Using artificial intelligence and machine learning arty consumes every possible piece of input data and then learns what the best choice would be to maximise returns, given all of the possible historical choices arty could have made in the same situation, while maintaining the target volatility.
If a stock is going up arty can remember if it was better, in that situation, to increase the weight to that stock or decrease it. Similarly, if a stock is going down arty remembers if it was better to bail out or go all in.
Of course, implied in this strategy is an assumption that history repeats itself. Some people may be uncomfortable with this and feel that it is too big a leap, but here is what we have learned on the subject:
- arty only invests in ETFs – while a single stock may be unpredictable, ETFs, which can reflect whole markets, are typically more cyclical.
- arty starts with a fresh slate each month – arty does not ‘overfit’ i.e. use hindsight to build a model that performs well in the past. Even in the backtesting, arty starts each month with no advance knowledge and yet has continued to deliver consistent profits every year by following the same strategy.
- arty can make money in all market conditions – because the portfolio is made up of uncorrelated assets arty is not solely dependent on just one asset class. If the equity market crashes arty can still make money by allocating to other uncorrelated instruments, such as bonds or to our own ART 3x actively managed fund. Knowing when to make that switch is arty’s skill.
arty is unique in the world of investing. It is a professional portfolio management tool, built by a quantitative hedge fund, and offered to everyday investors at a low cost. We hope that people will use arty to change the way they invest, helping them to access the higher returns available in the financial markets without the accompanying risk.