Skewerage v Steady Vol: Dawn of Justice

I never plan long term.

As I grow older my horizon has become shorter and shorter. This vexes my girlfriend.

Naturally, I retort, my days on the planet reduce with every day lived.

Our holidays are spent jumping from one town to another in Indonesia or China, nothing's booked more than a day or two in advance.

Short-termism is a luxury many cannot afford, sure it can be costly but being far sighted can be costlier.

Take the Great Meat Crisis of 1910 for example.

The US government worried about low supplies of meat in the country and planned Hippo ranches in order to secure the nation's meat supply.

Or, the Global Cooling Crisis of the 1970s. The next ice age was due and the US government castigated for not stockpiling food in preparation for impending shortages.

The problem with long term thinking, however astute, is that the future is a wily beast.

Many investment strategies are shown to work over the long term, but coming to me with a long term plan is a little like selling me a stake in your Hippo ranch operation. Sure it looks good on paper, but I can't wait decades to see whether you are right!

So, I combined both the longer term Steady Vol and tactical skew strategy into one. The indicator is now,

weight.INDEX_SP500 = 1 / latestVix - skewChange;

(Code for the backtesting IDE is here)

The Sharpe is now 0.75 over 25 years. Less than a 1 in 200 chance of trading noise. And over 50% higher than the S&P 500 Sharpe over the same period.

What's even more interesting is that the combined strategy's Sharpe is far greater than the sum of its parts, which means we're benefitting from the two indicators working as a team. When one is in a tight jam the other covers its ass.

To put it another way - diversification.

I am still no closer to taming annual Sharpe ratios. Perhaps I need to lengthen the horizon a little in the hunt for more predictability.

The long term steady vol strategy slowly compounds returns while the tactical skew strategy avoids large short term losses and gambles on gains when apocalyptic possibilities wane.

Diversification and balance is a helpful in any part of life. Super heroes, asset classes and timing strategies benefit from it.

Perhaps even I could benefit from mixing a little longer term planning with my short-termism.