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In Episode 64, we welcome David Varadi from Blue Sky Asset Management.\nDavid tells us a bit about himself before he and Meb jump into investing. Meb starts by referencing a quote from Blue Sky\u2019s website:\n\u201cUnlike endowments, investors do not have an infinite time horizon. For this reason, we believe that a traditional strategic asset allocation approach based on modern portfolio theory is suboptimal. It makes more sense to adapt to changes in the economic environment. We favor a dynamic approach to asset allocation using market information to guide our investment decisions. Most importantly, we believe that a systematic, quantitative approach is necessary to avoid emotions and biases in decision-making.\u201d\nMeb\u2019s a fan of all the ideas in that quote, so he asks David to expound and discuss his general market framework.\nDavid tells us how it\u2019s easy to be a buy-and-hold investor when market is going up; much harder so when the market is falling \u2013 especially when nearing retirement. Significant drawdowns can be devastating. So David tells us that \u201cmanaging risk is absolutely critical.\u201d Investors need to be able to adjust their strategies to handle a wide variety of market scenarios \u2013 bear markets, varying interest rate scenarios, and inflation. And \u201cif you have a dynamic asset allocation, you have the ability to be more in tune with the market regime that is currently going on.\u201d\nMeb asks David to dig deeper \u2013 what are the rules and frameworks in place that make his models dynamic?\nFor David, much goes back to fundamentals, trend, momentum, and volatility.\xa0David starts with a strategic allocation that reflects longer-term assumptions. But what\u2019s interesting is how David uses volatility in concert with trend/momentum, helping him know when to be in the market versus cash. Most people think time-series momentum is a binary decision, but David brings probabilities into the discussion.\nMeb then asks about the challenges a retail investor faces when trying to implement the strategies David has been discussing.\nA big challenge is tracking error. The more dynamic you are (moving away from buy-and-hold indexing), the more potential tracking error. Another issue is how often you trade. David tells us that the investor has to ask himself what is most important \u2013 does the investor want to reduce the drawdown in a 2008 scenario, and if so, is he willing to take the tracking error associated with that?\nMeb echoes this tradeoff between buy-and-hold versus active. It\u2019s very hard to look \u201cdifferent\u201d than the market and/or your neighbors when you\u2019re underperforming.\nNext, Meb brings up another Blue Sky whitepaper, this one about retirees and risk. David hits the high points, discussing the challenges of volatility in retirement.\nThere\u2019s plenty more in this episode, including the new areas David is researching\u2026 David\u2019s most memorable trade (one involves put options, the other Bitcoin)\u2026 And David\u2019s one piece of investing advice to listeners, involving three mental \u201cbuckets\u201d for your asset allocation.\nWhat are they? Find out in Episode 64.\nLearn more about your ad choices. Visit megaphone.fm/adchoices