Stay-With-It Strategy Test
Choose a robust strategy you can survive and follow through its worst drawdowns
- Difficulty
- Expert
- Time to result
- ~ongoing to results
- Steps
- 6
- Confidence
- 99%
The stay-with-it test treats implementability as part of investment quality. Before adopting a strategy, investors estimate whether its leverage, volatility, liquidity, funding, and emotional burden can be survived during a severe drawdown. When losses arrive, the default response is restraint rather than impulsive model changes. Risk may be reduced if the position was oversized, but poor recent performance alone is not evidence that the mechanism has failed. The investor then conducts a disciplined review: has technology, market structure, or another relevant condition genuinely invalidated the process? The mind remains slightly open, while the burden of proof stays on changing a strategy supported across long periods and many markets. The ultimate decision rule is practical: prefer a very good strategy that can be maintained to a theoretically optimal one that creditors or emotions will force you to abandon.
Origin
Extracted from Masters in Business through Cliff Asness's account of AQR's 2007 quant drawdown and its decision to preserve the investment process.
Core principles
- 01Short-term pain does not automatically invalidate a sound process
- 02Emotions may be unavoidable, but they need not control decisions
- 03A strategy must survive both financial and psychological stress
- 04Investigate real structural change without reacting to every loss
- 05A very good executable strategy beats an optimal strategy that will be abandoned
How to run it
- 1
Model the breaking point
Estimate losses, volatility, liquidity demands, and funding pressure under severe but plausible conditions.
Pro tip Include behavioral and organizational limits, not just mathematical risk.
Watch out Historical volatility may understate crowded-trade and fat-tail losses.
- 2
Remove forced-sale risks
Keep leverage modest, align funding duration with asset duration, and avoid dependence on fragile short-term credit.
Pro tip Structure the portfolio so outside parties cannot force liquidation at the worst moment.
Watch out Illiquid assets financed with short-term leverage create a potentially fatal combination.
- 3
Set invalidation criteria
Specify what structural evidence—not merely losses—would show that the strategy's mechanism has weakened or disappeared.
Pro tip Examples include faster information diffusion or permanent changes in implementation costs.
Watch out Do not invent new criteria during a drawdown to justify panic.
- 4
Default to disciplined inaction
If exposure remains survivable and no invalidating evidence appears, avoid reactive changes and allow the process time to work.
Pro tip Reduce monitoring frequency when constant observation causes time dilation and emotional overreaction.
Watch out Doing nothing is not appropriate when leverage or liquidity threatens survival.
- 5
Review with the mind ajar
Re-examine assumptions and evidence while expecting a robust, extensively validated process to remain intact.
Pro tip Assign an independent team to test whether the world has genuinely changed.
Watch out Blind faith and reflexive abandonment are equally dangerous.
- 6
Preserve long-term execution
Continue the strategy at a scale that stakeholders can financially and psychologically sustain.
Pro tip Use advisers and governance rules to reinforce previously agreed behavior.
Watch out An optimal backtest is worthless if the real investor cannot follow it.
In the wild
A crowded liquidation drove value and momentum positions sharply against many quantitative funds. AQR experienced severe losses and emotional strain but found no evidence that its long-tested mechanisms had disappeared. It retained the models while continuing to examine the assumptions, and much of the drawdown subsequently reversed.
→ Process discipline allowed the firm to participate in the recovery rather than locking in losses through capitulation.
An adviser rejects a theoretically optimal allocation after determining that its expected drawdowns would cause the client to sell. The adviser adopts a somewhat less aggressive portfolio, documents its expected bad periods, and schedules reviews around process evidence rather than daily performance.
→ The client is more likely to remain invested long enough to earn the strategy's expected return.
Common mistakes
Confusing pain with invalidation
Losses may be consistent with a valid statistical process. A change requires evidence that the mechanism or implementation has deteriorated.
Building an unsurvivable portfolio
Excess leverage, illiquidity, or short-term funding can force liquidation even when the long-term thesis is correct.
Tweaking the model under stress
Investors often disguise panic as research by changing a model precisely when its expected premium has become more attractive.
Is it for you?
Best for
It is best for investors, advisers, and institutions using evidence-based strategies with meaningful drawdown risk.
Not ideal for
It is not ideal for strategies whose leverage, liquidity, or funding structure can force liquidation before recovery.
From the transcript
“when something's not working I think of the time, the right thing to do is nothing. Maybe some risk control if the bets too big,…”
“if you see no reason why what you've done in the past, what you think has worked for a hundred years in fifty different places,…”
“The great strategy you can't stick with is obviously vastly inferior to the very good strategy you can stick with.”
From the episode
Masters in Business: AQR Scott Cliff Asness (Audio)