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systematic unemotional reactions to changes in sentiment

rules based investing

Sentiment

Markets are a human construct and are largely driven by sentiment. One day, people might be hyper-focused on the growth multiples of technology stocks; the next day, they could be looking at a specific sector like inflationary commodities. The following day, their attention might shift to the Federal Reserve's interest rate policy and its impact on the broader economy.

No one can predict what the next trend will be. It's important not to follow the crowd with every news headline. Instead, focus on consistency and adjust your risk allocation according to your progress toward your goals. In other words, use simple rules and make investment choices that are both nimble and conservative, based on quantifiable parameters.

Algorithm

An algorithm is simply a function that executes an instruction based on certain criteria. Much like how your hand instantly moves away from a hot pan and willingly towards cool grass, your brain reacts instinctively and automatically to certain conditions. However, how many times have you been fooled by touching a beautifully plated hot dish or hesitated to venture outside on a cloudy day that later turned sunny?

Caution, focus, and removing human emotion from buy and sell decisions are key components of achieving positive investment returns. Using an algorithm or a set of simple rules focused on how well your portfolio is progressing towards your goal is, in our view, the best way to actually achieve that goal. By keeping you on track and invested, our algorithm systematically adjusts your portfolio over time, exposing you to either more or less volatile investments depending on how well you are progressing towards your performance goal.

Slow and steady wins the race.

Rebalancing

A portfolio needs to be rebalanced as markets, performance, and time horizons dictate. Markets will move up or down, and the effect on individual investments within a portfolio will change by varying degrees and magnitudes relative to each other. As outperformers grow, exposure needs to be pared back. Similarly, investments which fit an allocation model that have underperformed need increased exposure, even if their performance has lagged.

The portfolio should be mechanically rebalanced into or out of these risk assets according to how the portfolio is performing relative to its original expectations and the exposures needed to achieve the initial goal. This systematic rebalancing is typically done through an algorithm.

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