Trade Like A Quant

Sometimes dubbed the rocket scientists of Wall Street the meaning of quantitative analysts often takes on a broad meaning.  Quant is a fairly broad term honestly, but roughly means someone who takes an extremely mathematical approach to the markets.  While some quants use Einstein level math there are some practical lessons you can take away to use in your own portfolio.

More than anything quantitative analysts apply a rigid rules based approach to the markets.  They have specific buy and sell signals that they adhere to religiously and consistently.  This is where their great returns come from(if their algorithms are correct).  While some get blamed for things like the flash crash where the DOW dropped 9% in minutes it would be wrong to say that it was the strangest thing to ever happen in market history.  A signal for a quant could be something as simple as the 200 day moving average or as complex as analyzing S&P 500 futures contracts volume and expiration and placing an order nanoseconds before the futures expire and pocketing the spread, which is the high frequency trading world.

So how can you apply this? Well a buy and hold strategy sounds great in theory, but its harder to stick to in practice.  Sure its easy to say when the market has not had a down year since 2008, but it would have been really hard to hold onto your portfolio is 2008 when the US equity market shed about 40%.  If you haven’t experienced a massive drawdown like that imagine draining half of your savings.

So if you are someone who can’t weather massive drawdowns, and we don’t blame you if that is the case, consider taking a rules based approach.  It is great to have an investment plan that you can stick to and might even help you sleep better at night.  Here is a simple rule to get you to start thinking about what you might want to do:

Apply a short, medium, and long term moving average to your portfolio.  When conducting your rebalancing, best done once a year for tax benefits, tilt most towards the assets in upward trend above the moving averages, more towards the one that are not trending as strongly above one or two of the moving averages, and least towards those in a downtrend under the moving averages.

Note: This can be considered a trend following approach and is a popular investment style that may or may not suit you.  Over time strategies go in an out of favor so its often wise to pick a strategy that you understand and believe in and stick with it over the long term.

Building wealth takes strong discipline and taking your emotions out of investing by applying rules to a strategy that works can often help mitigate bad decisions.

Don’t Let Trading Fees Eat Your Profits Away

stacked round gold-colored coins on white surface

There’s no point to keeping extra expenses in your life, it just weighs you down in the end. Like we said before, a dollar saved is a dollar earned. Get rid of cable and pay for streaming services of what you watch, get a credit card tailored to your most popular purchase category, cook more, etc. There’s a lot that can be done. Your portfolio is a steak, do you want a fatty piece or a lean piece that will marble when its cooked and not char? In today’s day in age, when you’re managing your investments, the same thing can be done.

Traditionally, there were very high broker and platform fees. You’d even pay commissions if you were placing orders for stocks over the phone or online. Fees have gotten lower for discount online brokerages where now instead of commission, platform fees, or managing fees, you’re paying per trade. Sometimes as little as $5 per trade. And while this seems cheap, for most people starting out these trading fees can really add up and significantly decrease your invested capital.

Younger investors in their 20’s and 30’s have flocked to Robinhood which uses Apex Clearing Corp. as their clearing house because it charges $0 in fees overall. It doesn’t offer all the bells and whistles like other online brokerages such as extended trading hours or research but you can upgrade to premarket and after market hours for a minimal sum. You even have the ability to leverage your capital up to 3x which is a nice feature for more experienced investors and people looking to amplify their returns. Quick disclaimer: Leverage trading is highly risky and we do not recommend it.

So now you have an online brokerage that you hooked your bank account to for free. But businesses need to make money and now you’re probably wondering how they make theirs. To keep it simple, they invest your uninvested capital. Don’t worry, your capital is still yours to invest as you wish whenever you wish. It’s also been rumored that they also sell your order flow and trading information to High Frequency Trading firms (HFTs or firms that trade using algorithms). If these rumors are true, they sell this information for a higher premium than your traditional brokers. This shouldn’t change your investing habits unless you are trading large blocks of shares at once.

For us at The Modern Piggy Bank, we use Robinhood for our discretionary accounts and allocate only a fixed percentage towards it after allocating into our other investment accounts like a Roth IRA and 401k’s using more traditional platforms like Fidelity which recently just announced that that they were offering zero fee ETF’s from Ishares in what will be direct competition to Robinhood.

Just know your cost of investing is less than what your father paid, and less than his father. You don’t have the excuse of having hidden costs or that you’re paying fees for x,y, and z. So don’t make excuses when you can make money. We truly do trust Robinhood implicitly when it comes to our money and our accounts. While we would like to see more features added in the future if you see us on our phones, it will most likely be us with the Robinhood app open checking our portfolios.