Multi-Strategy Asset Allocation and Seasonality Investing | How I Invest With Jay Kaeppel

In my opinion, one of the greatest gifts you can give yourself as an investor is to not corner yourself into a narrow lane.

If you remain curious, open minded and committed to a lifelong learning journey you’ll likely discover that there are many pathways to success as an investor.

No one particular approach is necessarily better than another.

Hence, not being married to any one particular style affords you the opportunity to combine various approaches in a multi-strategy manner.

If you can shake the shackles of conforming to a particular benchmark or strategy, you have a certain degree of freedom to assemble a portfolio where the potential for outperformance and risk management collide.

Our guest today on the “How I Invest” series is a curious and distinguished investor utilizing a fascinating multi-strategy approach.

I’m thrilled to welcome Jay Kaeppel as he shares his 30-30-30-10 Method.

Jay (@jaykaeppel) is a Senior Research Analyst at Sentimentrader.com and writes a monthly column (Explore your Options) for Technical Analysis of Stocks and Commodities magazine.

Additionally, he’s published four books on futures, option and stock trading:

•“Seasonal Stock Market Trends” (Wiley)
•“The Option Trader’s Guide to Probability, Volatility and Timing” (Wiley)
•“The Four Biggest Mistakes in Futures Trading” (Traders Library)
•“The Four Biggest Mistakes in Option Trading” (Traders Library)

Without further ado, let’s turn things over to Jay!

 How I Invest with Jay Kaeppel: Seasonality Investing + Multi-Strategy: 30-30-10 Method

Hey guys! Here is the part where I mention I’m a travel content creator! This “How I Invest” interview is entirely for entertainment purposes only. There could be considerable errors in the data I gathered. This is not financial advice. Do your own due diligence and research. Consult with a financial advisor. 

These asset allocation ideas and model portfolios presented herein are purely for entertainment purposes only. This is NOT investment advice. These models are hypothetical and are intended to provide general information about potential ways to organize a portfolio based on theoretical scenarios and assumptions. They do not take into account the investment objectives, financial situation/goals, risk tolerance and/or specific needs of any particular individual. 

Beat The Market And Accumulate Great Wealth Using A Rules-Based Approach

Who were your greatest influences as an investor when you first started to get passionate about the subject?

How have your views evolved over the years to where you currently stand?

If you had to recommend a handful of resources (books, podcasts, white-papers, etc) to bring others up to speed with your investing worldview what would you recommend?

When I started out, I had the benefit of being able to read Fosback’s Stock Market Logic, Marty Zweig’s Winning on Wall Street, Yale Hirsch’s Stock Market Almanac and Peter Lynch’s One Up on Wall Street.

Their work made it clear that you could beat the market and accumulate great wealth using a rules-based approach.

It was just a question of how best to allocate capital and how to maintain discipline (the 2nd part is the hard part).

Human Nature Is A Detriment To Trading Success

Aside from investing influences, what real life events have molded your overall views as an investor?

Was it something to do with the way you grew up?

Taking on too much risk (or not enough) early on in your journey/career as an investor?

Or just any other life event or personality trait/characteristic that you feel has uniquely shaped the way you currently view yourself as an investor.

Education.

Travel.

Work Experience.

Volunteering.

A major life event.

What has helped shape the type of investor you’ve become today?

The main influence is that I have either made – or watched other make – every mistake imaginable in the markets.

First, let me make it simple. Investment/trading success really involves a small handful of steps:

*What are you going to trade?
*How much will you allocate?
*What criteria will cause you to enter a trade?
*What criteria will cause you to exit with a profit?
*What criteria will cause you to exit with a loss?

Develop specific answers to those questions and then stick with it.

Sounds so easy, right?

But once a person experiences the financial and emotional pain of a larger than expected drawdown, a lot of it goes out the window for most people. It’s just human nature.

Which ultimately led me to write down:

Jay’s Trading Maxim #16: Human nature is a detriment to trading success and should be avoided as much as humanly possible.

Sort of tongue in cheek, but – I claim – 100% accurate.

I also had the benefit of studying the market from a lot of different angles.

I traded a few stocks.

Then stock index futures were created.

Never being a great stock picker, it made trading easier in a way to just focus on an index.

Then I learned options, became a trading systems programmer and was the head trader at a commodity trading advisory firm for 9 years.

We had 8 up years and were down -2% the other year.

Then we had a -15% drawdown – hardly catastrophic in the futures markets, and our two biggest clients pulled their money, and we had no viable business left.

From there I joined a trading education firm.

It was a great experience to teach people the ins and out of trading.

There is a good feeling in knowing that you are keeping people from spending years making the same mistakes you did.

I also learned a lot of things from the other instructors.

From there I went to a more traditional money-management firm.

It ended up a lot like the CTA firm.

A terrific track record, plenty of assets, then a couple of subpar years and a lot of the money went away.

As I said, human nature.

Being at Sentimentrader is terrific because I can write about such a wide variety of topics – technical, fundamental, seasonal, stocks, bonds, futures, ETFs, option – there is never a dull day.

One last thing I should mention is seasonality.

I wrote a book on the topic – Seasonal Stock Market Trends – and am much more of an adherent than most.

But I think that provides an “edge.”

When I was teaching trading I would ask a room of traders, “Who has ever used technical analysis to find a trade?”

And virtually everyone would raise their hand.

Then I’d ask, “Who has ever used fundamental analysis to find a trade?” and most people would raise their hand.

Finally, I’d ask “Who has ever used seasonal trends to find a trade?”, and usually it was just me and one guy in the back who wasn’t entirely sure if he wanted to raise his hand or not.

But the point I would make is this: If you’re looking for an “edge” in trading, are you more likely to find it, a) looking where everyone is looking (technical and fundamental analysis), or b) where hardly anyone is looking (i.e., seasonal analysis).

The thing with seasonality though is that a) it requires a leap of faith, and b) you typically want to use it conjunction with something else.

A simple example: Seasonality suggests that a given market “should” rally during a certain period.

Within that period that market starts to advance.

Buying something that a) “should be” rising (or falling) and b) actually IS rising (falling) is a great time to be on board.

Pick Your Methods And Stick With Them

Imagine you could have a three hour conversation with your younger self.

What would you tell the younger version of yourself in order to become a better investor?

It would only be about a three-minute conversation.

Organize your approach, allocate capital conservatively, manage risk first and foremost, pick your methods and stick with them.

Stop tinkering with new ideas and tweaks all the time!!

My primary problem has always been that I am more of a researcher than a trader.

I enjoy analyzing all facets of the markets.

Guys like me tend to focus more on gaining knowledge.

The truly great traders focus on accumulating great wealth.

There is a difference.

30-30-30-10 Method: No Technique Or Strategy Works 100% Of The Time

Let’s pop the hood of your portfolio.

What kind of goodies do we have inside to showcase?

Spill the beans.

How much do you got of this?

Why did you decide to add a bit of that?

If you’d like to go over every line-item you can or if would be easier to break your portfolio into categories or quadrants that’s another route worth considering.

When do you anticipate this portfolio performing at its best?

The investment model I came up with was developed with the intention that it would be solely for my own use.

In other words, it is tailored to my own personality, and my own experience in considering many different types of investment techniques and strategies.

It also extends from my own belief that there is no “one best way” to invest.

No technique or strategy works 100% of the time.

So, part of the goal – at least the hope – is that by combining things a certain way it can smooth out the overall equity curve over time.

Two other overarching points.

Two mistakes that many investors make are:

*Putting too much faith in their own ability to react appropriately when there is money on the line, OR
*Never trusting their own good instincts – i.e., never taking a chance on their own good ideas

So, I refer to it as the “30-30-30-10 Method”.

Probably the best way to describe it is to peel it back a little at a time.

So, using the broadest stroke possible:

Pass #1 30-30-30-10 Method

*30% is always invested in something other than cash (stocks, bonds, commodities, gold)
*30% is in or out of the market at any point in time using trend-following methods
*30% is in order out of the market using objective strategies or systems
*10% is what I call “Whatever.”

That’s the simplest explanation.

Now let’s go back in with a little more detail.

Pass #2 30-30-30-10 Method

*30% always in:

The only thing as bad as being fully invested while the markets are going down, is being 100% out of the markets during a strong rally.

The psychological damage of mentally counting all the money you are NOT making can be just as damaging – and lead to just as much second-guessing down the road – as actually losing money can.

So, the purpose of the first 30% allocation is to ensure that I always have money in the market.

My own preference is for value stocks paying a decent dividend.

But for a younger investor it could mean putting money into an index fund or variety of index funds as a form of dollar-cost averaging.

*30% in or out based on trend-following methods:

The purpose of this portion is not so much market timing.

The purpose is simply to avoid ever riding a major bear market all the way to the bottom full invested.

In a major, long drawn-out bear market this portion will ultimately end up in cash.

Which means you will miss some portion of the decline (which is beneficial financially and emotionally), and that you will have some cash available to buy back in after the bottom.

*30% in or out based on objective strategies or systems:

Anyone who analyzes the market long enough comes across a method or method(s) that they believe can “beat the market” over time.

The goal here is to put these strategies to work and hopefully never really think about them, i.e., no emotional strings pulling at you.

You just follow the rules – in or out depending on those rules.

You do your best thinking up front, establish the rules and then simply follow the rules.

And if your strategies are any good this is where you stand to make the most over time.

*10% “Whatever:”

Some investors have great confidence in their own ability.

Nothing wrong with that – UNTIL – one day they allocate way too much of their capital to something they are sure is going to be great – and it blows up.

Devastating financially.

Devastating psychologically.

By never allowing yourself to put more than 10% into any one “random idea”, you never run the risk of dropping a hand grenade at your feet.

On the other end of the spectrum, some people have zero confidence in their ability to pick stocks or spot opportunities, even though they might be pretty good at it.

So, they never allow themselves the chance to get rich based on their own best thinking.

In retrospect, why did most of us never buy Apple or Microsoft or Amazon?

It wasn’t like their long-term success was a secret.

In most case its because we just didn’t trust the idea of allocating capital based on our own subjective thinking.

Allocating 10% to “whatever” means its OK to “take a shot” on virtually anything.

Just so long as the bets aren’t too big.

And just to be clear, the intent is not necessarily to put 10% of the portfolio into one thing.

The intent is to use this portion of the portfolio to fund different “random” ideas.

But, you know, “whatever.”

One last round of insight.

Pass #3 30-30-30-10 Method

*30% always in:

In essence, this 30% slice should be treated as if it were 100%.

Have a plan, follow the plan, diversify if it makes sense (some growth, some value, etc.).

On the other end of the spectrum, in an extreme case – i.e., a major bear market in stocks – it is acceptable to invest this portion heavily in
bonds (think late 2008) or even commodities (think high inflation of late 1970’s or even 2021-2022).

As I said, I prefer value/dividend stocks, but there are several other “core” strategies for the “always in” portion that are evaluated monthly:

#1. If CPI Inflation <=3% and > = -3% Then hold Discretionary else hold Staples
#2. If 10-yr treasury yield < 7mo EMA Then hold Discretionary else hold Health Care
#3. If the Sentimentrader “Bear Market Probability-Macro Index Model” is bullish then hold Technology else hold Staples

The Sentimentrader Bear Market Probability-Macro Index Model is deemed bullish when it drops below -50 and bearish when it rises above +20.

*30% in or out based on trend-following methods:

I use three separate trend-following methods.

There is no one best trend-following method – they ALL get whipsawed from time to time.

One personal note: if all three get out – i.e., this 30% portion of portfolio is all in cash, then I will wait for two of the three to turn bullish again before moving money out of cash.

Just trying to avoid whipsaws that see 10% go back in, then go back out, then back in, etc.

Mostly focus on index funds with this 30% just to keep it simple.

Also prefer IJH (mid-cap index) and RSP (equal weight SPX) from November through April and SPY and QQQ from May through October as long as the trend-following methods are bullish.

*30% objective strategies:

I have my own proprietary strategies.

Each uses its own unique (though not necessarily what I would call highly sophisticated) risk on/risk off trigger, and then each uses a form of sector relative strength analysis to decide where to invest.

The goal is to be invested in the best sectors while the market is rallying.

I also rely more heavily on seasonality than most.

Just a personal preference.

If one or more of the stock market strategies is unfavorable and the commodity (as an asset class) model is favorable this portion can be allocated to commodities.

*10% Whatever:

I’ve gotten away from trying to be an active stock-picker (because I am not very good at it).

Now allocate primarily to three areas, 1) Small speculative positions, 2) selling far out-of-the-money naked puts to generate income (the goal is never to actually buy the underlying stock.

Also, only sell OTM puts when at least two of the trend-following models are bullish, 3) allocating any “leftover” money to the other strategies in the other categories.

Anything not allocated is simply held in cash.

Current Allocation: 30-30-30-10 Method

As of 1/3/2023:

*30% always in = 15% in value/dividend stocks and 15% in three core strategies
*30% trend-following = 30% in cash
*30% systems = 30% in cash
*10% Whatever = 5% in SLV and 5% in cash

Sum:

*30% stocks
*5% SLV
*65% cash
*0% bonds
*0% commodities (broad-based)

Benefits Of Combining Strategies: No One Style, Or Approach Works All Of The Time

What kind of investing skills (trading, asset allocation, investor psychology, etc) are necessary to become good at the style of investing you’re pursuing?

Is there a certain type of knowledge, experience and/or personality trait that gives one an advantage running this type of portfolio?

The reason I don’t really tout the 30-30-30-10 approach is that I think most individual investors would find it to be too complicated, or at least involving too many moving parts.

And that’s probably a valid criticism.

Most individuals naturally migrate to being either “buy-and hold”, or “trend-following”, or a more “strategic trading approach” (ex., a momentum trader), or a “whatever, seat-of-the-pants” investor.

It’s just not natural for most people to even try to put all of these styles together.

But the advantage – I believe is, as I said earlier, no one style, or approach always works all the time.

So, if an investor picks one rigid approach, during those times when that approach is not working, they will eventually experience “maximum doubt.”

And if they are allocating too much capital (the most common mistake that results in large equity declines) they may experience that “I can’t do this anymore” moment.

And it almost always comes at exactly the wrong moment.

30-30-30-10 Method: Toned Down Or More Aggressive Style

What would be a toned down version of your portfolio?

Something that’s a bit watered down.

Conversely, what would be a more aggressive version of your portfolio, if someone were willing to take on more risk for a potentially greater reward?

Toned down:

*40% always in: Buy and hold a mutual fund or index fund
*40% trend-following: In or out of an index fund based on one or two trend-following methods
*20% objective strategies: Pick one (or two) and stick to it
*0% “Whatever”: Just skip this part

More aggressive:

*The overall approach is already relatively complex in terms of the number of different strategies used.
*The one way to increase aggressiveness would be through the use of leverage.

Either margin in buying stocks or leveraged funds or ETF (presumably more so when the trend-following and/or objective strategies are bullish and less so when they are not).

Always Focus First On “What’s The Worst Case Scenario?”

What do you feel is your greatest strength as an investor?

What is something that sets you apart from others?

Conversely, what is your greatest weakness?

Are you currently trying to address this weakness, prevent it from easily manifesting or simply doubling down on what it is that you’re great at?

Greatest strength: Experience, and an understanding that the markets absolutely, positively WILL put you through the wringer from time to time.

As a result, never over allocate and always focus first on “what’s the worst-case scenario?”; and risk management.

Greatest weakness: Like everyone, I want more and sometimes get impatient.

Also – as you may have surmised – I have a tendency to sometimes make things more complicated than they need to be.

source: Jay Kaeppel on YouTube (The investment performance results presented here are based on historical backtesting and are hypothetical. Past performance, whether actual or indicated by historical tests of strategies, is not indicative of future results. The results obtained through backtesting are only theoretical and are provided for informational purposes to illustrate investment strategies under certain conditions and scenarios.)

Seasonality Is A Viable Tool: It’s All In How You Use It

What’s something that you believe as an investor that is not widely agreed upon by the investing community at large?

On the other hand, what is a commonly held investing belief that most in the industry would  agree with that rubs you a bit differently?

That seasonality is a viable tool.

Most people think of it as some sort of esoteric “magic trick.”

But like everything, its all in how you use it.

If you blindly assume that some seasonal trend is always going to work and you get careless in allocating capital or using a stop-loss, it will ultimately blow up on you.

I always assume that whatever seasonal trend I am looking at will be wrong “this time around,” and manage risk accordingly.

The one I don’t agree with is that “bonds are the foundation” of a portfolio.

First off, most investors don’t know that t-bonds (which trade based solely on rate changes) trade differently from high-yield bonds (which are much more highly correlated to stocks).

Last year a lot of people rushed into TIPs bonds expecting to hedge themselves against inflation.

But very few of them understood that TIPs only really hedge against inflation spikes above expected inflation, and almost no one realized how sensitive they are to interest rate changes.

They got clobbered when rates rise.

Likewise, very few recognize that interest rates move in very long-term waves (30 years up, 30 years down roughly).

From 1981 to 2020 t-bond yields fell from 15% to 0.80%.

Yet everyone kept buying long-term treasuries.

Then when long-term rates rose in 2021-22, they couldn’t believe how badly they were getting crushed.

When interest rates get below a certain level, there is little to no value in bonds.

Bonds belong in a portfolio if they offer value: a decent yield, a declining trend in interest rates, if they are trading inversely to other assets – otherwise they can be dead weight.

source: Better System Trader on YouTube

Most Crypto Enthusiasts Can’t Explain What They Are Buying

What would be the ultimate anti-Jay Kaeppel portfolio?

Something you’d never own unless you were duct-taped to a chair as a hostage?

What about this portfolio is repulsive to you?

Conversely, if you were forced to Steel Man it, what would potentially be appealing about the portfolio to others?

What is so alluring about it?

I am not a fan of crypto.

Nevertheless, I am essentially agnostic and not an ardent naysayer.

I just simply do not understand what I own if I buy Bitcoin or any other cryptocurrency.

And the bigger concern is that most crypto enthusiasts I have encountered can’t explain exactly what they are buying either.

That said, I call myself agnostic for the following reason: Most assets that experience a “bubble” have their day in the sun, then blow up and either limp along for years or go away altogether.

Interestingly, in its relatively short trading history, Bitcoin has already experienced four separate drawdowns in excess of -80%.

That is possibly unprecedented.

It spiked, collapsed 80+%, rallied to a new high, collapsed 80+% again, and did so two more times.

Now threatening to do it a fifth time.

The fact that it has bounced back so many times keeps me wondering if maybe there really is something “there.”

Connect With Jay Kaeppel

Twitter: @jaykaeppel

Linkedin: Jay Kaeppel

Books:
1) Seasonal Stock Market Trends
2) The 4 Biggest Mistakes In Option Trading
3) The Four Biggest Mistakes In Futures Trading
4) The Option Trader’s Guide to Probability, Volatility, and Timing

Senior Market Analyst: SentimenTrader.com

Nomadic Samuel Final Thoughts

I want to personally thank Jay for taking the time to participate in the “How I Invest” series by contributing thoughtful answers to all of the questions!

If you’ve read this article and would like to be a part of the interview series feel free to reach out to nomadicsamuel at gmail dot com. 

That’s all I’ve got!

Ciao for now!

Important Information

Investment Disclaimer: The content provided here is for informational purposes only and does not constitute financial, investment, tax or professional advice. Investments carry risks and are not guaranteed; errors in data may occur. Past performance, including backtest results, does not guarantee future outcomes. Please note that indexes are benchmarks and not directly investable. All examples are purely hypothetical. Do your own due diligence. You should conduct your own research and consult a professional advisor before making investment decisions. 

“Picture Perfect Portfolios” does not endorse or guarantee the accuracy of the information in this post and is not responsible for any financial losses or damages incurred from relying on this information. Investing involves the risk of loss and is not suitable for all investors. When it comes to capital efficiency, using leverage (or leveraged products) in investing amplifies both potential gains and losses, making it possible to lose more than your initial investment. It involves higher risk and costs, including possible margin calls and interest expenses, which can adversely affect your financial condition. The views and opinions expressed in this post are solely those of the author and do not necessarily reflect the official policy or position of anyone else. You can read my complete disclaimer here.