Passive Cycle Dynamics. 2 Simple Investment Transformations.

Two Simple Investment Transformations

Transformation 1: Cycle Dynamics

A simple example shows the first transformation

Transformation 2: Money management with “Tradestops”

Cycle Dynamics and Tradestops can now be combined with other models to create an outstanding investment process – Passive Cycle Dynamics.

Just 4 quarterly steps to Passive Cycle Dynamics execution

Conclusion and Potential


Two Simple Investment Transformations

I believe that every investor can transform their investment returns in just two easy steps. Both of these steps have been incorporated into a new investment product I call Passive Cycle Dynamics.

This new investment product combines the most successful investment ideas and new technologies of recent years into a simple low transaction process which is easy to execute on just a quarterly basis, with minimal daily risk management monitoring.

This will form an additional option for cycle investors. Now there are 5 :

  1. Static Allocation: all weather system, or variation of the Ray Dalio Bridgewater concept.
  2. Passive Allocation: quarterly rebalancing.
  3. Cycle Dynamic systems: week/monthly rebalancing.
  4. Hedgeye style cycle system modules: daily/weekly rebalancing
  5. Cycle Dynamic Portfolio. Comprehensive multi module portfolio approach. Currently 9 modules.

For investors with an interest in cycle dynamic investing there is now a full range of products to consider, with very different levels of activity and risk diversification.

Transformation 1: Cycle Dynamics

Asset allocation is the most important factor for most portfolios. So how should we look at this to make the most effective investment decision?

Let’s simplify this as much as possible to make the point very clear. The three most uncorrelated key asset classes are Stocks, Bonds, and Gold. The chart below shows that if you make an individual choice between Stocks, Bonds or Gold, the outcome largely depends on which asset you buy and when. Easy to see in retrospect, but the future is unknown. So how should an investor decide their asset allocation?

Many investors turn to experts to make this decision for them, but in a highly complex system is there really anyone who can do this reliably on an ongoing basis? If investors instead look for a successful repeatable ongoing process with a great track record, it is very likely they will have much better long term results.

It turns out that a simple algorithm produces great results just by selecting only those asset classes that are in an uptrend. This methodology is shown below in red, and is called the “Trend System”.

A simple example shows the first transformation











The simplest system does the job!

What is immediately clear is the obvious superiority of the “Trend System”, the red line in the chart above.

The ultimate goal of investing is not just higher returns but also lower volatility. By introducing just the simplest system, which combines these three asset classes dynamically, a completely different and clearly superior result can be achieved.

All that was done to create the “Trend System” was as follows:

From the three asset classes: Stocks, bonds, gold. Invest equally in whatever is going up. [“Up” is defined as the 3-month moving average divided by the 10-month moving average.] That’s it. Thumps the stock market with less risk.

This idea comes from Meb Faber, who first came across the idea from the excellent research firm Ned Davis Research. 

Meb ran the numbers from 1971 to mid-2015 (when he wrote about it). The results were similar to the 20-year chart above. Individually over those 40-plus years, stocks did best (returning 9.9%), and gold did the worst. But the simple system crushed them all… Its compound annual gain was 13.1%, and crucially with dramatically lower volatility.

Congratulations you have now found and understood one of the key transformations to your investment results.

This is just the beginning of understanding Cycle Dynamics. To understand more see

Transformation 2: Money management with “Tradestops”

“The investor’s chief problem – and even his worst enemy – is likely to be himself.” – Benjamin Graham.

The chart below shows the outstanding performance of “True Wealth”, one of the flagship newsletters products of Stansberry & Associates. It soundly beat the S & P 500 over a 13 year period. Good investment ideas well executed clearly make a difference.

However, good ideas executed with outstanding money management techniques are, perhaps even more transformative. The chart below shows that the same ideas, just traded with different money management rules makes an even bigger difference!


Yet, almost no one ever talks about money management, even though it is likely that it has at least an equivalent impact on investment returns as the quality of investment ideas.

Furthermore, this part of investment management is much simpler to execute. It is just following prescribed rules, rather than making constant complex discretionary judgments at every stage.

If you want a huge and simple edge over the returns of almost every other investor, then perhaps, all you need to do, is follow simple sound money management rules.

This video shows how. Just by following simple money management techniques your results can be transformed.

Congratulations you have now found and understo0d another of the key transformations to your investment results.

Cycle Dynamics and Tradestops can now be combined with other models to create an outstanding investment process – Passive Cycle Dynamics.

Once the money management advantage is clearly understood it is just the beginning of consistently improved returns. The money management edge can be applied to multiple investment programs to further improve returns with better execution rules.

The last pieces in this strategy is to overlay all the highly valuable Cycle Dynamic work discussed on the Cycle Dynamic web page, In particular the Cycle Dynamic and Hedgeye models. These play a big role in the cyclical asset allocation selections discussed below.

Just 4 quarterly steps to Passive Cycle Dynamics execution

Execution Step 1 ETF Universe Selection

Reward to Risk forms the basis for all choices in this process. This is an ongoing search for the best available ETFs to represent each asset class. As this may change over time I have not listed the chosen ETFs.

There are two categories for allocation – 50% baseline selections, 50% cyclical additional selections.

Here is the current baseline portfolio. The PVQ (portfolio volatility quotient) is just 2.99%. This is less than 30% of the PVQ of the S&P 500 index.

PassiveCDbaseline 042816






So far the performance this year demonstrates the comparison.  The volatility of the baseline portfolio is just 25% of the S&P 500, and the drawdown is less than 10%. Yet the baseline portfolio still outperforms by over 2%.

PassiveCDbaselineVsSPY 042816


Execution Step 2. The baseline choices stay stable, but each quarter the cyclical selections need to be made in line with longer term cycle trends, using all the best available intelligence from both Hedgeye and Cycle Dynamics.

Execution Step 3. Once the ETF selections are made, create the full allocation Using Tradestops Position Sizing for the whole portfolio.

Execution Step 4. Monitor the allocation daily to Tradestops uptrend for all positions. Sell any ETF Next Day if a stop signal is hit. Do not select any asset not in a Tradestops uptrend.

Execution Step 5. Repeat the process every 3 months

Conclusion and Potential

Passive Cycle Dynamics adds a great deal to the Cycle Dynamics product line up. While it has some relatively static elements, it avoids the risk of a multi year period of underperformance experienced by the All Weather approach by limiting all holdings to a Tradestops uptrend condition. Then in addition half the portfolio is adjusted quarterly to the currently strongest long term cycle uptrends using the best information available.

Passive Cycle Dynamics has the real potential of introducing a low level of transactions to enable consistent outperformance of the All Weather approach, which is the anchor fund to world’s biggest hedge fund.

This also has the benefit of a lower activity level than many of the other cycle dynamic options.






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