If you read my blog regularly, you know that I’m fully transparent in how I invest my own money.
It’s not good for the investing community when advisors say one thing to clients, yet do another with their own money. It’s equally questionable when fund managers don’t invest in their own funds. After all, if we won’t put our own dollars behind our market ideas, why should you?
For these reasons, I invest all my public investable assets in Cambria funds and strategies, and then publish my allocations. Just recently, I’ve made an adjustment to my personal portfolio, so this quick update will let anyone know who’s interested.
I think it is important to read my prior updates for valuable context on how I think about investing and why I allocate the way I do. If you’d like a refresher on my more recent portfolio adjustments, check out: October 2016, February 2016, January 2015, or October 2014.
In my most recent allocation update last October, I wrote that my investable assets are now allocated in a handful of Trinity portfolios. On a scale from one to six, together, they average out to a Trinity value of approximately 3.5. This is a moderately aggressive portfolio that gives me exposure to over a dozen ETFs that collectively own over 20,000 securities around the world. (If you’re newer to Cambria or my blog, feel free to review the various Trinity portfolios by clicking here.) I expect to rarely alter this portfolio, as it is global diversified, has tilts to value and trend, and autorebalances on its own already.
However, I’m adjusting that allocation by reducing my collective Trinity exposure by approximately 10%, and in place, adding Cambria’s new Tail Risk ETF (Ticker: TAIL).
Please note that we are NOT adding TAIL to any of our six Trinity portfolios. I’ll explain the thought process behind adding TAIL to my personal allocation, yet not to our Trinity portfolios.
Why Am I Investing?
Investing in a tail risk strategy has some similarities to purchasing insurance. Insurance policies obviously come at a cost. It’s no different here with TAIL.
In a flat-to-rising market, I expect my tail risk allocation of US government bonds and S&P 500 put options to produce negative yearly returns. This will be a drag on my overall portfolio returns. But given that we are in one of the longest bull markets of all time, with lofty stock market valuations, and a low volatility environment, I think it is prudent to allocate to a tail risk strategy.
Cambria is also purchasing TAIL. Why you ask? For the same reason airlines hedge fuel costs, and Starbucks hedges the price of coffee.
I wrote about this in my recent post, “A Risky Stock Market for Retail Investors is 4X as Risky for Advisors”. Simply put, a falling stock market negatively impacts only the investment portfolio of the average retail investor. Yet for advisors, it impacts their personal portfolio, their shorter-term business income, potentially their longer-term business income, and in dire situations, the viability of their company.
Given this heightened sensitivity, it’s more appropriate for Cambria to purchase TAIL as well, therein hedging its business revenues, than it might be for the average retail investor.
One thing to keep in mind: I am adding TAIL to my allocation as a shorter-term, strategic play. I’m not buying this as a permanent fixture of my long-term allocation. How long I’ll keep TAIL in my portfolio is something I’ll evaluate over the coming quarters, but I would guess it could remain for the next 1-3 years or so.
Why not in Trinity?
To prevent a misunderstanding, I’m not saying TAIL is inappropriate for a retail investor. What I am saying is that such a decision is best made by that investor, not me.
There are lots of ways to hedge a traditional stock portfolio.
- Don’t own stocks – We often say the best way to hedge a risk is to not take the risk in the first place. No one says you have to own equities, and cash is an acceptable “sleep at night” choice.
- Diversify – This one is a no-brainer. Adding foreign stocks, bonds, and real assets historically does a great job of helping to lower volatility and drawdowns. It does not guarantee protection, but on balance it helps.
- Liquid alts – Adding strategies like trend following and managed futures can also help to hedge equity risk.
- Tail hedge – The first three choices above have positive expected returns, and usually hedge a portfolio when stocks do poorly (but not guaranteed). Buying a basket of puts on the stock market plays a different role, and on average will be a cost to the overall portfolio returns.
If a greater percentage of your overall net worth/income is tied to the stock market, or you’re growing uncomfortable with your invested capital’s exposure to this market, then perhaps TAIL is the right move for you. But such a decision is appropriate only for you to make, being fully aware of TAIL’s negative-return expectancy and being comfortable with it. It would be inappropriate for me to make this decision (or mandate, rather) for all Cambria clients by making TAIL a core holding in our Trinity portfolios.
So that’s it for today. Decreasing my collective Trinity exposure by 10% and adding a 10% allocation to TAIL.
Diversification may not protect against market loss.
This material represents the portfolio manager’s opinion and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice or a specific recommendation of securities.
There is no guarantee that the Fund will achieve its investment goal. Investing involves risk, including the possible loss of principal. Derivatives are financial instruments that derive their performance from an underlying reference asset, such as an index. Derivatives, such as put options, can be volatile, and a small investment in a derivative can have a large impact on the performance of the Fund as derivatives can result in losses in excess of the amount invested. Options used by the Fund to offset its exposure to tail risk or reduce volatility may not perform as intended. There can be no assurance that the Fund’s put option strategy will be effective. The put option strategy may not fully protect the Fund against declines in the value of its portfolio securities. The Fund is actively managed.
To determine if this Fund is an appropriate investment for you, carefully consider the Fund’s investment objectives, risk factors, charges and expense before investing. This and other information can be found in the Fund’s full or summary prospectus which may be obtained by calling 855-383-4636 (ETF INFO) or visiting our website at www.cambriafunds.com. Read the prospectus carefully before investing or sending money.
The Cambria ETFs are distributed by SEI Investments Distribution Company (SIDCO), 1 Freedom Valley Drive, Oaks, PA 19456, which is not affiliated with Cambria Investment Management, LP, the Investment Adviser for the Fund.