TuringTrader tracks more than two dozen portfolios to cover all typical investment objectives. This variety can quickly become overwhelming and lead to the paradox of choice. This article describes the aspects to consider when choosing a portfolio.
Know Your Investments
No matter how well a portfolio is designed and how low its volatility is, there will be times where the returns fall short of our expectations. In these challenging times, it is important to stay rational, act with a steady hand, and stay the course.
There is one key element investors need to see things through: conviction. In our opinion, investors can only achieve the required level of confidence by knowing what they invest in. In particular, investors should know:
- the charts and metrics shown
- the methods of modeling and analysis used
- the mechanics of the portfolio they invest in
- the range of historical outcomes
Therefore, we highly encourage our members to use the materials provided on this site to learn about investing in general and their portfolios in particular. Curious investors will find a lot of helpful information on TuringTrader.com:
- portfolio comparison, putting portfolio returns and risk into context
- portfolio pages combining charts, metrics, and rules with a discussion from an investor's point of view
- explainer articles for our methods, charts, and metrics
- background articles, explaining specific portfolio implementation details
Based on this information, we suggest that you invest in a portfolio that you genuinely believe in. Doing so will shield you from the fear of missing out and from changing direction at the most unfortunate time.
Focus on Risk, not Returns
Many investors focus on returns when choosing a portfolio. This approach is understandable, as the primary purpose of investing is appreciation. However, investors should realize that returns are meaningless unless considered in the context of risk. Consequently, the first question investors should ask themselves is how much risk they are willing to take on with their investment.
In our experience, many investors overestimate their appetite for risk until faced with volatility. However, it is generally not a good idea to switch direction when your portfolio is under water. Therefore, we believe it is better to start with a lower-risk portfolio and possibly transition toward more aggressive investments later than the other way around.
Often the main driver for taking on higher risk is the fear of running out of time before retirement. Again, we suggest changing the perspective. Riskier investments lead to higher volatility and possibly higher drawdowns. As a result, riskier investments often take longer to recover after significant drawdowns. This has profound implications.
Volatility has two sides to it. While accumulating wealth, some amount of volatility is actually helpful. Thanks to dollar-cost averaging and regular rebalancing, volatility can help increase portfolio returns. But once investors reach retirement or are otherwise planning to decumulate wealth, volatility becomes a major concern. The deeper the drawdowns and the longer they last, the faster the regular withdrawals deplete your funds. Therefore, investors should scale back their portfolio risk when they get closer to retirement.
For each portfolio tracked on the site, TuringTrader calculates vital metrics. The maximum drawdown and maximum flat days make the risk very tangible. Investors are encouraged to think about their reaction to losing the maximum drawdown and taking the maximum flat days to recover from these losses. Backtests provide only one data point for measuring risk and returns. Because history does not repeat itself verbatim, it is essential to understand the likely range of possible outcomes. Our Monte-Carlo simulations are a helpful tool to determine the likelihood of returns and drawdowns. We encourage investors to learn about our charts and metrics, especially our risk metrics. We have written an explainer article covering the charts and metrics we use throughout the site.
Consider Your Tax Situation
All portfolios on TuringTrader.com aim to beat the market in terms of risk-adjusted returns. To do so, they rely on tactical asset allocation. In other words, they rotate the assets to make the best out of the current market environment.
Unfortunately, trading stocks and other securities has tax implications. While profits remain untaxed while they are unrealized, they become subject to taxation when they are realized. Investors need to keep this in mind when considering trading in taxable accounts. There are two possible ways to address this issue:
- consider tax efficiency when choosing a portfolio. TuringTrader.com has some great choices for tax-efficient portfolios
- choose an aggressive portfolio. TuringTrader.com offers some portfolios with returns high enough to add significant after-tax value
Think about Your Lifestyle
Investing with TuringTrader requires discipline. To achieve the results shown on the site, you need to follow the rebalancing schedule as closely as possible. While it might be ok for a portfolio rebalanced monthly to delay rebalancing by a couple of days, portfolios on weekly or daily schedules are typically much less forgiving.
Therefore, it is crucial to choose a portfolio that fits your lifestyle. TuringTrader offers portfolios for every lifestyle. The effort required for portfolio maintenance ranges from 5 minutes a month up to 15 minutes a day. All of our portfolios are rebalanced while the markets are closed, so there is no rush - but you still need to make the time.
Diversify with All-Stars Portfolios
Each portfolio on TuringTrader.com aims to improve risk-adjusted returns through diversification and rotating assets. However, we don't know what the future brings and how well the portfolios will deal with unforeseen circumstances. In addition to diversification across asset classes, it is also possible to diversify across investment styles by investing in multiple portfolios simultaneously.
This is where our family of All-Stars Portfolios comes in. Each of them combines several of our Premium portfolios into a meta-portfolio with better returns at lower risk. And because each of the component portfolios relies on a different mechanism, our All-Stars Portfolios can successfully cover a broader range of market situations.
We firmly believe in the advantages of our All-Stars Portfolios, which is why TuringTrader.com puts particular focus on these. However, more sophisticated investors can also mix and match our component portfolios and create their own variants.