TuringTrader's Rain or Shine

Strategy Rules

The operation of Rain or Shine can be summarized as follows:

• start with the All-Seasons asset allocation, leveraged up to 125%
  • 37.50% S&P 500
  • 18.75% 10-year treasuries
  • 25.00% 2x leveraged 30-year treasuries
  • 9.375% gold
  • 9.375% commodities
• exit the leveraged ETF, based on its ratio between momentum and volatility
• reduce exposure to other assets by 50%, based on a trend-following filter
• invest any remaining capital in short-term Treasuries

We have always been big fans of the All-Seasons Portfolio, because of its admirably smooth equity curve and low drawdowns. However, we felt that many investors could not fully appreciate these qualities, given the portfolio's low returns.

Rain or Shine uses the same baseline asset allocation as the All-Seasons Portfolio but leveraged up to a total exposure of 125%. This is achieved through holding up to 25% in a 2x leveraged ETF tracking 20+ year U.S. Treasuries. Rain or Shine uses active management to remedy decay of the leveraged ETF, and to reduce the drag on performance that unfavorable asset classes may have at times. These management methods are applied sparingly, in order to reduce dependency on exact market timing.

Diversification

Just like the All-Seasons Portfolio, our Rain or Shine's is always well-diversified across multiple asset classes. The combination of asset classes should do well in almost all economic environments.

Due to the portfolio's dependency on bonds, Rain or Shine bears some interest-rate risk. Future will tell how the portfolio will fare in an environment of rising interest rates. However, as of early 2020, this is not an imminent issue.

Returns & Volatility

Compared to the All-Seasons Portfolio, our Rain or Shine strategy delivers better performance at a lower risk. This allowed us to apply additional leverage and beat a 60/40 over the full economic cycle, and at a substantially lower risk.

Rain or Shine delivers outstanding risk-adjusted returns, especially for a strategy with such low maintenance requirements: The Sharpe Ratio exceeds 1.0, and the Martin Ratio is around 2.9. Both of these metrics are substantially better than those of the All-Seasons Portfolio and demonstrate the value of active management.

Account & Tax Considerations

When the strategy scales its asset exposure, it triggers taxable events. More than 50% of the total assets are held throughout, leading to long-term taxation of those capital gains. However, interest received from bonds is taxable at the full income tax rate. As Rain or Shine holds a higher percentage of bonds than typical stock/ bond portfolios, its overall tax burden is slightly higher.

Rain or Shine makes use of a 2x leveraged index ETF, which is considered a high-risk instrument. Most brokerages require signing additional disclosures before allowing investors to use these instruments in their accounts. We believe our use of this instrument to be responsible and in the spirit of reducing overall portfolio risk.

Rain or Shine invests in up to six ETFs at a time. Therefore, it requires a minimum investment of about $6,000.