How to invest in turbulent times
If current market volatility is causing you some grief, don’t worry – you’re not alone. A lot of quantitative investors are being hit. One of them, Cliff Asness, has some sage advice that should see you through even the toughest of times.
Asness is an investment expert I pay particular attention to. He is the founder, Managing Principal and Chief Investment Officer at AQR Capital Management. Some fun facts about Cliff include:
- He received a Ph.D. in finance from the University of Chicago, where he studied under Eugene Fama;
- He has been named one of the 50 Most Influential People in Global Finance by Bloomberg Markets Magazine;
- AQR, which he co-founded in 1998, had assets under management of US$226 billion at last count; and
- He is famous for destroying computer screens during challenging periods in markets.
As systematic investors go, Cliff is kind of a big deal. More than that though, he is smart, charismatic, and fun to read. If you have any interest in quantitative investing, I encourage you to check out the blog on the AQR website.
Even if quantitative investing is not what you’re about (and for most people it probably isn’t), one of his recent articles contains, I think, some real gems of insight about what it takes to succeed in investing.
The background is this: notwithstanding a long and storied track record, AQR has been having a rubbish 2018. A representative AQR portfolio (essentially a mix of the various strategies offered) was down about 14 per cent through to the end of October. This portfolio has annualised volatility in the region of 6 per cent, so down 14 per cent in less than a year is pretty sucky.
I should note that AQR is not alone here. Quantitative investors generally have had a tough time in 2018, and at MIM our own quant models are showing negative returns over the last 12 months in most major world markets including USA, Western Europe and Australia (although interestingly, Hong Kong has been having a blinder).
In response to the poor performance, Cliff has put together a long and thoughtful piece setting out his assessment of this recent experience and what it might mean. You can access a brief summary as well as the full article here.
One of the points that I think he makes well is this: It is difficult to stick with an investment strategy through tough times, but this is a big part of the reason a good investment strategy works – if it were easy to stick with it, the benefits would likely soon be arbitraged away.
In other words, it’s unrealistic to expect successful long-term investing to always be easy or consistent. Short-term pain is not only a part of the investment experience, it is probably a necessary part.
That is not to say that you should never change an investment strategy that isn’t working. However, when absolute or relative underperformance hits (and it will), understanding why you invested in the strategy in the first place, and being able to respond thoughtfully and objectively to the underperformance, may be what separates long-term success from long-term ordinariness.