Advanced signal processing and integrated bear market strategies have forever changed the art and science momentum investing.
The performance of cars and telephones has improved considerably since Modern Portfolio Theory (MPT) was developed in 1952. Yet MPT’s simplistic “diversify-and-rebalance” mantra remains dominant in the industry. Technology advances occur when additional underlying problems are identified and solved. Since the advent of MPT, we've come to know that (1) there is momentum in market data, (2) noise in market data disrupts the momentum signal and reduces the quality of investment choices, (3) there are known methods for noise reduction, (4) bear markets are different from bull markets, (5) there are multiple forms of hindsight bias, (6) AI tools can both produce and reduce hindsight bias, and (7) risk is not a one-dimensional problem cured by a single dose of diversification. It’s a multidimensional problem, and diversification’s passive risk dilution is only just the start.
MAI Indexes are based on Temporal Portfolio Theory (TPT), a significant extension to MPT that additionally employs temporal (time-based) market data and the cross-disciplinary sciences of Matched Filter Theory, Differential Signal Processing, Adaptive Filtering, Fuzzy Logic, and others. These are the same tools that have enabled WiFi, USB, iPhones, digital TV, assembly robots, and remotely controlled rovers on Mars to perform so well.
"If you want different results, do not do the same things." A. Einstein
While most Indexes focus on a specific slice of the market, such as a particular sector, factor, theme, or asset class, MAI Indexes are complete, self-contained tactical portfolio management systems that evaluate over 500 ETFs each month and select a portfolio that seeks to provide the five things investors want most.
The MAI Bull-Rider Bear-Fighter Index begins with an 80/20 equities/bonds allocation typical of a classic Growth portfolio. Each of eight underlying momentum strategies selects one ETF (its momentum leader) for the portfolio to hold. During bull markets, the Index allocates 35% to sectors, 15% to countries, 10% to global regions, 10% to factors, 10% to style-mix, and 20% to bonds, treasuries, and gold.The index automatically allocates 100% to defensive ETFs when bear market strategies are signaled by StormGuard Armor.
The MAI Tactical Growth & Income Index begins with a 30/70 equities/bonds allocation typical of a classic Conservative portfolio. Each of eight underlying momentum strategies selects one ETF (its momentum leader) for the portfolio to hold. During bull markets, the Index allocates 15% to sectors, 5% to countries, 5% to global regions, 5% to dividends, 70% to bonds, treasuries, gold, and the like. The index automatically allocates 100% to defensive ETFs when bear market strategies are signaled by StormGuard Armor.
See how MAI Indexes use genetic algorithms to eliminate hindsight selection bias, expand its universe of candidate ETFs, and build on its powerful Temporal Portfolio Theory roots to reduce market noise and improve the probability of making better momentum investing choices that lead to higher returns and lower risk, as detailed in our book "Conquering the Seven Faces of Risk."
At the very heart of momentum investing performance is its proficiency for extracting trend signals from noisy market data. Merlyn.AI employs the cross-disciplinary mathematics of electronic signal processing and matched filter theory, the very same mathematics that enables Ethernet, WiFi, and smartphones to perform so well. See all of this graphically demonstrated in just 7 minutes.
Conquering the Seven Faces of Risk breaks new ground with its development of Temporal Portfolio Theory as a critically important extension to MPT. The new cross-disciplinary mathematics of electronic signal processing and problem segmentation clarify momentum signals and apply bear market strategies to their separate problem class. Risk avoidance is far superior to ordinary risk dilution.
Please drop us a line (above) if you have any further questions about our momentum investing indexes or their integrated bear market strategies.
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