Recent articles that I found interesting and made me think.
One of the concepts he presents is the idea of barbell investing. A barbell investment portfolio is constructed by combining a high percentage (say 80-90%) of very low risk investments with a small percentage (10-20%) of very risky investments. The idea is that the high proportion of the lowest risk investments ensures limited damage to one’s portfolio should all hell break loose while exposure to the riskiest investments allows decent upside.
For testing purposes, we create 2 samples. The first sample is from 1927 to 1962 and the second sample is from 1963 to 2013. The samples are selected in a way that we can compare the results of the momentum simulations to the value simulations, which run from 1963 to 2013.
Have a look at the chart nearby. It comes to us from Goldman Sachs via FT Alphaville, and it shows that spikes in volatility are quite unusual. Periods of low or falling vol is what seems to fill the time between volatility spikes. Its like plains of tall grass between the occasional redwood tree.
This is not surprising if one looks at the distribution of returns. Volatility tends to cluster and historically there have been periods of very low negative daily changes.