When do I change a system?

I’m changing my investing system this month. Here’s the only reason I ever touch one.

People ask me all the time when I change a system. The answer surprises them: never because it’s doing poorly. That’s chasing a dragon. The only times worth changing are when there’s a structural shift in the market or I’ve genuinely learned something. I’m making a change this month, so here’s the actual reasoning.

The investing system isn’t underperforming. The equity curve is fine, and there are always long stretches where it does little. That’s expected. The thing that bugged me was the average exposure: about 70%, which means roughly 30% of the account sits in cash most of the time. I’m not that old yet. Sitting a third in cash through a raging bull market doesn’t fit where I am.

So instead of forcing the trade-hunting sleeve to deploy more, I’m slotting in something that uses that idle cash better. The new portfolio runs three engines: the broad-strength rotation (now 10 names instead of 5), the relative-strength leaders (5 names, unchanged), and a new dual-momentum sleeve across global stocks, bonds, commodities, and real estate, holding only what’s strong both relative to peers and in absolute terms.

Combined, it’s roughly four times the market’s return at a quarter of the drawdown over 26 years. Worst drawdown was 12%, oddly enough in 2016, not 2008 or COVID. Touch it once a month, ignore it the rest.

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— Michael Nauss, CMT, CAIA, CDMS