Are short term liquid investing strategies better than long term ones?

[FallenApple]

Because of the statistical nature of autocorrelation, we know that time events that are closer together are more correlated to each other than to time events that are further apart. Which makes sense because differing perturbations of complex chaotic systems can, and do, have wildly differing trajectories.

So in that sense, does it make sense to invest most of ones portfolio in highly liquid assets so as to take advantage of short term correlation between time events rather than to bet on the long haul, of which should be less correlated to current knowledge of the system?

Liquid assets essentially allow one to act quickly in response to evolving market systems since it should have more power to utilize data from closely connected time distances and hence more correlation to draw reliable inference from. This allows one to possesses a very useful ability: quick liquidation of the vast majority of one's assets if better investment vehicles or opportunities arises. And this can be done repeatedly over the long run to replace one liquid asset after another depending on what the market favors to be highly liquid in any given time slice.

I'm assuming that because of the inherent strength of short term correlation between time events, one can just iteratively update their strategy based on currently obtained knowledge, which is somewhat akin to bayesian reasoning, but fast acting under the assumption that time correlation is much greater between time data slices that are close rather than those that are far.

 

[andrewkirk]

Autocorrelation of stock prices tends to be positive at short lags (a few days) because of sentiment-based 'momentum'and negative at longer lags because of value-based mean reversion.

Unfortunately that insight doesn't deliver a foolproof market-beating strategy because the cut-off between the two is hard to measure and varies over time. That's why quant managers are always refining their strategies, sometimes even using computer-based automated refinement rather than judgement-based.

In addition, it is generally accepted that illiquid assets include an 'illiquidity premium' in their expected return. Investing only in liquid assets foregoes that premium. Good strategy involves matching liquidity of assets to that of liabilities, in order to maximise the advantage that can be taken of the illiquidity premium without introducing material liquidity risk.

 

[Rive]

This kind of short term/long term distinction is just an illusion, a known psychological trap of trading. To determine the degree of 'correlation' you always have to use the indicators belonging to the relevant timeframe. If you did that, then the 'safety' at different timeframes is ~ the same.

Traders are often tends to shift to shorter timeframes due psychological stress, fear. It is an urge to secure profit... But this behavior has no real benefit: it'll just prevent winning trades to run their courses in full, reducing the possible profit, ending with less effective R/R than optimal.

The opposite trap is about 'hope': people tends to sit in losing trades for long time and hoping that it'll turn.

So at the end winning trades will be short and losing trades will be long. That's it when trading is about psychology.

 

[FallenApple]

Autocorrelation of stock prices tends to be positive at short lags (a few days) because of sentiment-based 'momentum'and negative at longer lags because of value-based mean reversion.

Unfortunately that insight doesn't deliver a foolproof market-beating strategy because the cut-off between the two is hard to measure and varies over time. That's why quant managers are always refining their strategies, sometimes even using computer-based automated refinement rather than judgement-based.

In addition, it is generally accepted that illiquid assets include an 'illiquidity premium' in their expected return. Investing only in liquid assets foregoes that premium. Good strategy involves matching liquidity of assets to that of liabilities, in order to maximise the advantage that can be taken of the illiquidity premium without introducing material liquidity risk.

So maybe like a 50/50 split?

Also, how important is fungibility?

I was originally thinking about eventually going into real estate but I can’t project out 30 years. I don’t think anyone can. So I am reconsidering that as a long term goal.

I might keep half in cash/cash equivalents. And then half parked in a diversified range of assets that has illiquid premium but has low buy in and high fungibility.

I was think of not taking on liabilities so as to not have any liquidity risk. The liquid assets can be used to seize opportunities. Many view cash accumulation as useful for emergencies or protection of illiquid assets. But I’m thinking that just having high purchasing power at all times allows one to seize opportunities . Because much of the environment is random , one may or may not luck out with an opportunity in the short run, but given enough time, these events do pop up. But opportunities are expensive and need purchasing power to be fully ultized.

 

[russ_watters]

...The liquid assets can be used to seize opportunities... But I’m thinking that just having high purchasing power at all times allows one to seize opportunities . Because much of the environment is random , one may or may not luck out with an opportunity in the short run, but given enough time, these events do pop up. But opportunities are expensive and need purchasing power to be fully ultized.

Do you have any specific examples of such opportunities you would have seized if you could have?

The big risks are:
1. Accurate assessment of the "opportunity".
2. The opportunity cost of having your money sitting on the sidelines instead of being in the game.

To be honest, this strategy sounds to me like a mixture of word salad and wishful thinking.

 

[FallenApple]

Do you have any specific examples of such opportunities you would have seized if you could have?

The big risks are:
1. Accurate assessment of the "opportunity".
2. The opportunity cost of having your money sitting on the sidelines instead of being in the game.

A few times. I could have started a business. I could have risen up the social ladder by marrying into a wealthy family. There were a few missed opportunities. Not many, but a few.

Sure, 100% accurate assessment of opportunity is not guaranteed, but not being able to act on a good assessment is worse.

I'm just looking to see what's a good ratio. Investing all, or even most, of one's money in an illiquid asset can't be a good idea.

Stocks are fine since they are liquid. I would consider stocks, but that's about it. Real estate investing is good in the form of REITs, which I have been considering lately.

 

[russ_watters]

A few times. I could have started a business. I could have risen up the social ladder by marrying into a wealthy family. There were a few missed opportunities. Not many, but a few.

These aren't really investment opportunities. I'm talking about what you would do with a pile of money of unspecified size sitting in a savings account. I guess I envisioned an answer along the lines of "buy Apple in 2007" or "short Tesla in late 2018"...or some day-to-day equivalent.

I had expected a more clear-cut idea of what you wanted to do with this fund.

Sure, 100% accurate assessment of opportunity is not guaranteed, but not being able to act on a good assessment is worse.

This is not generally true in the context of stock market investing. Most funds don't beat the market over the long term and trying to time investment based on opportunities is in general a losing strategy.

I'm just looking to see what's a good ratio. Investing all, or even most, of one's money in an illiquid asset can't be a good idea.

I thought you were part of discussions we had about this a year ago? You should try coming up with a plan for different needs over different timeframes; car trouble, a small health issue, a year without a job, etc. This will dictate how much and how liquid your rainy day funds need to be. For me personally I see no need for cash in a checking account beyond what I need this month.

Stocks are fine since they are liquid. I would consider stocks, but that's about it. Real estate investing is good in the form of REITs, which I have been considering lately.

You can invest in REIT funds similar to stocks, but beyond that gets beyond what I'm familiar with.

 

[FallenApple]

These aren't really investment opportunities. I'm talking about what you would do with a pile of money of unspecified size sitting in a savings account. I guess I envisioned an answer along the lines of "buy Apple in 2007" or "short Tesla in late 2018"...or some day-to-day equivalent.

I had expected a more clear-cut idea of what you wanted to do with this fund.

This is not generally true in the context of stock market investing. Most funds don't beat the market over the long term and trying to time investment based on opportunities is in general a losing strategy.

I thought you were part of discussions we had about this a year ago? You should try coming up with a plan for different needs over different timeframes; car trouble, a small health issue, a year without a job, etc. This will dictate how much and how liquid your rainy day funds need to be. For me personally I see no need for cash in a checking account beyond what I need this month.

You can invest in REIT funds similar to stocks, but beyond that gets beyond what I'm familiar with.

Many of the best wealth building tools requires a large buy-in and high reserves. For example, new entrepreneurs often fail because they lack reserves to get them through the hard times at the beginning before they establish themselves.

If one has a job as a tenured professor or an in-demand physician, then that's nearly as good as being paid all your future savings up front. In that case, it doesn't matter one lives month to month because the money is practically guaranteed to come in unless something goes terribly wrong.

I think REITs might be good. One can reap many of the real estate benefits of a high cost of living and in demand area( such as San Francisco) remotely and without a long term contract, hence forgoing the interest that would have been one would have to pay had one gotten a mortgage there and also many of the high cost of living requirements. And its much more liquid along with the added benefit of diversification.

 

[russ_watters]

This thread is too unfocused/handwavey, so it is locked.