I’ve been thinking about portfolio volatility and the psychological stress big percentage draw-downs causes. As many in the growth space probably have experienced in the past 2-3 years its not always conductive to a good night’s sleep when individual shares drop 70% and one’s portfolio halves from the highs. Thankfully many of the issues have bounced back recently and things are a bit rosier atm.

One of the things I have considered is trying to use trends and hedges to smooth things out. The benefit is obvious – draw downs can be less severe and capital preserved for another day.

In practice it is however likely to be far from straight forward and one will act on false signals and follow trends that aren’t really there. In addition, cost and churn will also affect the overall portfolio percentage return negatively even if done competently. Is this a price I’d be willing to pay to sleep better? Perhaps.

Seeing I’m an absolute novice scratching the surface things are likely to not be done competently. Hence why I’m just tinkering with a bit of play money to see if it is something I may consider in the real world and learn more about.

I chose Australian Equities Strong Bear Hedge Fund as it is leveraged somewhere between 2-2.75 which means a smaller percentage of capital is required for an effective hedge. The ASX is currently in an uptrend that started in November 2023. This corresponded with the 5 day EMA moving above the 7 day EMA followed by the 2 week EMA moving above the 4 week EMA. Currently we’ve had a reversal in that trend with 5 day EMA falling below 7 day EMA followed by 2 weeks falling below the 4 weeks EMA.

Now the uptrend may very well continue but in the short term may there be a fall towards the 300 day SMA of around 7500? If this happens and the EMAs reverse yet again the hedge comes off.

Is this likely to be right? Probably not. Can most part time or even full-time investors do this successfully? Maybe not. Can human and market psychology be boiled down into predictive models and applied successfully over the long term? Maybe by someone clever enough. Who knows maybe AI will have it all nailed down one day.