I’m an Expert in Quantitative Investing. Here’s My 5 Tips to a Happy Financial Life.


Quantitative investing - I’m an Expert in Quantitative Investing. Here’s My 5 Tips to a Happy Financial Life.

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If life were a carnival, personal finance is often the rollercoaster at the center of it all. Done right, and money can lead to an incredible time. There’s a reason why everyone wants a ride!

But picture yourself strapped in. Excited and anxious. As you’re barreling down to earth in a rickety cart, every turn and steep drop can make you wonder why you ever got on in the first place. As a quant-based analyst, I’ve seen how stocks can go from superstars to laggards in a few short months.

And if there’s one thing I learned, finding happiness from these twists and turns isn’t about avoiding the lows… and it’s certainly not about skipping the ride in the first place.

Instead, living a happy financial life involves keeping the thrills without losing your lunch.

That’s because risk and volatility are a part of the game. And how you approach these hazards goes a long way in determining life satisfaction.

Over the following few sections, I’ll share with you five pieces of advice that could boost the health of your investments and keep your emotional well-being in check. Though money is often the center of attention, it’s how you manage risk that brings peace of mind.

1. Check Your Portfolio Less

There’s an old saying, “A watched pot never boils.” In finance, a watched portfolio seems to do… well, whatever it wants, regardless of how intently you stare at it. Yet, many of us are guilty of treating our investments like our favorite TV show. We often tune in daily, waiting for the next twist and turn. It’s a constant attention sink that does nothing for our emotional well-being.

That’s because stock market returns are almost entirely random, given short enough timeframes. An investor checking their portfolio every minute will see shares up only 50% of the time, even with a winning strategy. Once you add the concept of prospect theory (which says losses are felt twice as strongly as their equivalent gains), you have a recipe for unending despair. It’s the reason why most traders burn out after a few years.

So here’s the good news: You can avoid much of this anguish by checking prices less often. If you looked at the S&P 500 daily (instead of by the minute), you would see gains 53.2% of the time. And the longer you wait between check-ins, the higher the chance you’ll see positive returns. It’s a strategy to help you stay invested for longer and avoid panic-selling during the downturns.

  • Daily: 53.2% positive results since 2000
  • Weekly: 56.8%
  • Monthly: 64.9% positive results since 1926
  • Yearly: 74.3%
  • Decennially (i.e., every ten years): 95.3%

What if we take the example of Rip Van Winkle — a storybook character who falls asleep for 20 years? If Mr. Van Winkle had checked his S&P 500 stock portfolio before falling asleep, there would have been no period since 1926 where he would have observed negative returns.

So, the next time you’re itching to open that investing app or refresh that webpage, remind yourself of the coin-flip conundrum. Breathe, step back, and let time work its magic. After all, sometimes, the best view comes from a little distance.

2. Trust Your Automated Ally

We all like to think we’re masters of our financial universe. That with the right amount of grit, intuition (and possibly a crystal ball), we can outfox the stock market.

But here’s a quirky fact: Even the sharpest Wall Street analysts — armed with mountains of data, predictive models, and enough coffee to keep a small village awake —  usually get stock predictions wrong. According to data from Thomson Reuters, the median 1-year price target for all S&P 500 companies made last year was off by 17.4%. (The average error was even worse, at 21%)

To put that in context, if I had predicted that every stock in the S&P 500 would gain 4.1% (the long-term capital market assumption by JPMorgan at the time), my median prediction error would have only been 13.4%. In other words, my simple algorithm of “add 4.1% to everything” beat thousands of hours spent by Wall Street’s brightest by an enormous margin.

That’s because stock prices can move independently from their fundamentals. These same Wall Street analysts managed to get their forecast earnings per share (EPS) within 10% of actual figures; the forecast errors came from failing to predict how markets would react to these earnings.

This is where trusting a systematic, data-driven approach to investing comes in. By using a consistent framework that ignores the market’s rollercoaster ride, we can separate our heads from our hearts.

To harness this fact, I’ve developed MarketMaster AI, a deep-learning neural network that takes millions of financial data points to create six-month stock predictions. It’s a system that combines both fundamental data and pricing action into a single model. Other methods, like TradeSmith’s Predictive Alpha and Luke Lango’s Prometheus Project, offer similar help.

It’s a technique that reduces decision-making stress, since you’re focusing on the things you can control (strategy, risk management, earnings predictions) and offloading the stuff you can’t.

3. Blame Bad Luck When Appropriate

Even the best algorithms can have bad days.

Imagine you’re at a game night where you’ve found a technique that gives you a two-thirds chance of doubling your money. That comes to a $1.33 expected profit for every dollar wagered — an excellent outcome by any measure.

So, what if you used that strategy and lost twice in a row? Or three times. Should you get upset at yourself?

Of course not.

That’s because occasional losses are always expected. No investment system guarantees 100% success. Not even “risk-free” Treasuries are guaranteed to outpace inflation. And the probability of multiple losses in a row is higher than you might expect. If we played five games with this strategy, we would still have a 21% chance of losing money overall. (Even at 50 attempts, there’s a 0.5% chance of walking away with a loss).

The trick is not to blame yourself for these losses. Because if you’ve chosen the right strategy, the rest is all about luck.

4. Leave Derivatives to the Professionals

We’ve all been there. Drawn to the shiny, irresistible world of financial derivatives. Short selling, options, leveraged ETFs, and so on. It’s the Wall Street equivalent of the candy aisle, filled with alluring treats that promise quick thrills. But, much like a candy binge, the after-effects can be… less than pleasant.

Let’s start with short selling, the high-stakes game where you bet on a stock’s price falling. Not only are the odds against you (stocks tend to rise over the long run). Position sizes worsen as a stock blows up. You’ll quickly find that shorting stocks requires constant monitoring of your portfolio since every price spike becomes a potential margin call. Not much has to go wrong for an entire savings portfolio to zero out.

Then there are options, leveraged ETFs and other such financial delights. At first glance, these derivatives seem like a ticket to riches. If stocks go up in the long run, shouldn’t call options and 3X leveraged ETFs go up even faster? Yet, the reality is that these vehicles have significant hidden fees. The average 3X leveraged ETF loses roughly 17.4% annually from compounding decay, which is why their issuers warn investors not to hold them for longer than a day. Meanwhile, options trading is a billion-dollar business… provided you’re one of the market makers. Exchanges compensate private market makers with cash generated from retail traders, making it one of the few negative-sum games on Wall Street. In other words, a winning strategy will need to both overcome these odds and provide profits on the top.

Stay away. For the sake of your happiness.

5. Know That It’s All Relative

Finally, financial satisfaction, as it turns out, is a tricky beast. Often, it’s more about how you view your wealth relative to everyone else.

Imagine plucking the wealthiest kings and queens from 300 years ago, and dropping them into the 21st century. Their regal jaws would hit the floor. With just a few taps on a smartphone, sushi from Japan or pasta from Italy can appear at your doorstep, like some culinary magic trick. Their toothaches can be cured with a trip to the dentist. And as for entertainment? Away with the jester! Companies like Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) have turned every living room into a personal Globe Theatre.

Similarly, some of the happiest quant investors I know focus only on the comparisons that matter: their performance relative to an appropriate benchmark. Most stock-based strategies are graded against the S&P 500 (or their sector of specialization), while options traders focus more on absolute returns. Those who use leverage adjust their benchmarks accordingly.

Meanwhile, the unhappy traders I’ve known usually compare themselves against others. And it’s a losing battle. Someone else will always have better returns that year… a fancier car in their garage… an earlier entry point into a rocketing company. (556 institutional investors owned Tesla in 2015, and you weren’t one of them?) It’s why we keep seeing billionaire hedge fund bosses turn to illegal practices to keep their edge, even though they have more money than anyone could ever need. After a while, money becomes a way for these fund managers to keep score.

That’s why it pays to think hard about your benchmark and then stick to it. You’ll be happy you did.

Conclusion: The Quantitative Ride to Financial Happiness

The key to bliss is often elusive. One moment, we’re riding high on an incredible stock market year. And the next, we’re holding our breath before checking our brokerage statements.

It’s why I favor quantitative finance in the first place. It’s one of the best ways to offload these stresses onto things we can control. Stock-picking algorithms, data gathering, and risk management are all tools to help us focus on changing what we can.

Of course, quant finance won’t fix everything. There’s still a daily itch to check how your portfolio is doing. Or to buy a couple of call options on Nvidia (NASDAQ:NVDA) to “see what happens.” The temptation of the cotton candy cart is always there.

But remember, it’s not just about growing your wealth. It’s also about nurturing your well-being. So, when the next twist of the rollercoaster comes, remember that the tools that can help — not hurt — your ride to financial happiness.

As of this writing, Tom Yeung did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Article printed from InvestorPlace Media, https://investorplace.com/2023/09/im-an-expert-in-quantitative-investing-heres-my-5-tips-to-a-happy-financial-life/.

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