Volatility managed portfolio

Checked October 2026

A volatility-managed portfolio holds more stock after a quiet month and less after a wild one. Moreira and Muir published it in the Journal of Finance in 2017. Backtoast ran it on SPY. A version that scales by volatility instead of variance made 11% a year at +0.92% a trade, but failed our test on trade frequency and capacity.

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Volatility managed portfolio

Volatility tends to cluster, so a calm month is usually followed by another. Each month-end the rule sets next month's stock weight from how much the market swung that month, more after a quiet month and less after a wild one, with the rest in T-bills.

The paper divides by the variance of the past month. This run divides by the volatility, which moves the weight less, and caps it at one and a half times the account. Its cash earned nothing and SPY's dividends weren't credited.

Dual momentum strategy also moves between stocks and safety, on 12-month returns instead of volatility.

When it works

It does best when volatility stays high for months, as it usually does in a long bear market, because the rule is already holding less stock for most of the fall. It loses ground when a crash starts from a calm month, or when the market rebounds right after a wild one. Traders use it to keep their risk about the same from month to month, and in our run it matched buy-and-hold at 11% a year.

Origins

Moreira and Muir found the market version earned 4.86% a year more than its market exposure explains, from 1926 to 2015, with a Sharpe ratio about 25% above buying and holding. The run used SPY from late 2021 to October 2026.

The run is Backtoast's, from 29 October 2026, after costs.