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Portfolio Update – March 2020 – Have you been taking too much risk?

Portfolio Update – March 2020 – Have you been taking too much risk?

Contents of this month’s post

  • Reading tips on how the All Seasons Portfolio Strategy has developed during the coronavirus bear market
  • Have you been taking too much risk as an investor?
  • The monthly portfolio update – Stocks still down, gold is up again
  • A lesson learned from a mistake I made on choosing my Long Term Government Bond ETF.

Hi, and happy to have you back for another monthly update!

Before we dive in to other topics, I really hope that you and your loved ones are well and safe during this unprecedented pandemic. These are worrying times and having ties with Italy through my girlfriend, we have kept an close eye on the development in the northern regions. She was brought up just 10km from Vo’ Euganeo so already early on, the development was close to us.

Here in Sweden, as you may have heard, our government are taking a different approach than the rest of Europe. I don’t condone how they are treating it, but I have been working from home for more than 3 weeks now (and counting), doing my part in not spreading the virus further. We are all in this together and everyone has a responsibility to limit the spreading.

If you haven’t done so already, remember to subscribe to the newsletter, to receive notifications of all new updates straight to your inbox.

And now down to business. Another month has passed with heavy impact of the Covid-19 coronavirus on the financial markets. There is so much that could be written on the coronavirus outbreak and its effects on the economy, and honestly, it is way more than can reasonably be covered in this blog post.

I will, however, share how it has impacted my portfolio so far, some personal observations, and also reflect on risk taking, as I believe many retail investors have been in over their heads on the stock market in recent years and only now get a glimpse of what risk means. And of course, I will share the usual monthly portfolio update.

But let me first share some reading tips on the subject.

As the current bear market is the first true test of my own All Seasons Portfolio, I am sure that it will provide you with some good insights if you are considering adopting the strategy on your own. In doing so, I recommend that you start with my portfolio update for February, where I shared some day-to-day impact on my portfolio and initial thoughts.

If, on the other hand, you are looking for an update from a more authoritative source than me (I may be a voice on the internet but will remain humble), Ray Dalio from Bridgewater Associates have made the development of their All Weather Portfolios publicly available in an article on LinkedIn. He also shares how he and his team have shaped their portfolios in anticipation for such events and working with risk. I highly recommend reading the whole thing, it’s a good read!

You should of course remember that the All Seasons Portfolio Strategy, or any other strategy for that matter, is not designed to eliminated risks or drawdowns on a day-to-day basis, but to balance it slightly longer term than that. For example, gold, which is included in the portfolio to counter drops in the stock market, dropped heavily in price during the initial stages of the bear market (see the February portfolio update), but has in recent weeks recovered that two week drop in only 48 hours. So over time, the portfolio should work decently.

Another example of that are Government Bonds that have worked as a cushion when the stock market lost a lot of value. This keeps the value of an All Seasons Portfolio pretty level during these volatile times.

Let me also share my two cents on my view on the development. I am no professional analyst, but even though we might soon see some better numbers in terms of the spreading, and we may slowly be able to get back to something that resembles ‘normal’, I don’t think we have seen the last of the recession just yet.

Considering how many millions are now loosing their jobs and their income in a very short amount of time, these jobs will not come back as quickly. That means that we may not see a V shaped recovery, but rather a shallow U. Stocks will rise again, but it may not be as quick as many would hope. And the longer the shutdown is in place, the longer it may take.

How can we prepare ourselves? The best we can do is to try to set aside some money for ourselves. But what is best for the individual is not what is best for the society: while we may fare better if we cut our spending and stop buying things, our local stores, restaurants and bars will suffer if no one comes to spend their money. It is not an easy spot we’re in. What do you think?

Have you been taking on too much risk as an investor?

I has been a long time since the last financial crisis. Most younger investors under 30, and anyone taking up investing during the last 10 years, have therefore never really experienced a bear market, so for many, myself included, this is the first time.

Naturally, when experiencing how easy it is to make money on the stock market – why would you diversify your portfolio with other assets? Government bonds in many countries have returned negative yields anyway, so why bother?

Such questions have been asked by many retail investors these past years. Many have also wandered into even riskier assets to increase their yields even further. Numerous retail investors have turned to speculating in assets such as cryptocurrencies, small cap companies and potential growth companies. The last few weeks though, many have woken up to realize they have been taking way more risk than they were prepared for. Have you been one of them? Bitcoin has not turned out to be the safe haven some had advocated and small cap companies have lost even more in market value than more established companies.

A common reaction among retail investors in March has been that the experienced drawdowns have been too steep and many have been burned. Hopefully, these investors will not develop a fear for investing, as it is increasingly important to save and invest for our future. But it is as important to have a healthy relationship with risk and to adjust the portfolio not to only include stocks. You need to remember to stay humble even when your stock portfolio has increased in value and remember to diversify.

For that purposes, the All Seasons Portfolio is a great alternative with its risk parity approach. How has your portfolio fared in the wake of the coronavirus crisis?

Portfolio Update March 2020

As for everyone, the Covid-19 outbreak has had an impact also on my All Seasons Portfolio – no one can escape it completely.

But, I have not experienced as deep drawdowns in my All Seasons Portfolio as the stock indexes, or other stock holdings that I have outside this portfolio. Still, my portfolio value has been quite leveled, but it is down a bit month by month.

Let us begin with the additions though. After the initial drop, I have added more to the equity portion of my portfolio. Not much, but basically some EUR 74 I had laying around in cash on the account. The ETF price has kept going done since, but at least I got it for a better price than a month before.

Still, I am holding too little Stocks in the portfolio, about 5 percentage points than the aimed allocation. Instead, I have too much gold, which takes up most of the offset.

What is interesting though, that despite the the market turmoil, the portfolio is fairly level. It still holds the similar levels as in December, even when taking into consideration the small addition of funds. And the drawdown YTD is still way better than leading stock market indexes.

For example, at the time of writing, the S&P500 is down about 19% since the beginning of the year, despite the increase the past trading days. Compare that to how my All Seasons Portfolio has fared: -0.4% since 31 December 2020 (the EUR 74 addition excluded). Quite impressive, right? Note that no new money was added when I did my restructuring of the portfolio in January.

For a clearer view of the actual assets in my portfolio, have a look at the below. For each asset class, I only have one ETF to keep things simple. It is much easier to handle the portfolio this way, and it would not be worth it for me to have several ETFs per asset class until I have a much bigger amount to work with.

ClassHistorical portfolioISIN2020-02-292020-03-31Change
TIPSiShares Global Inflation Linked Govt Bond UCITS ETFIE00B3B8PX14€458.80€440.73-3.94%
Govt Bond MidInvesco US Treasury 3-7 Year UCITS ETFIE00BF2FNQ44€390.83€400.202.40%
Govt Bond LongiShares Global Govt Bond UCITS ETFIE00B3F81K65€1,143.78€1,151.590.68%
CommoditiesInvesco Bloomberg Commodity UCITS ETFIE00BD6FTQ80€297.21€260.39-12.39%
GoldXtrackers Physical Gold ETCGB00B5840F36€511.25€518.741.47%
EquityVanguard FTSE All-World UCITS ETFIE00B3RBWM25€991.90€940.52-5.18%
€3,793.77€3,712.17-2.15%

I have discovered that I have made a mistake…

One of the most important reasons for me to run this blog is to share what I know and what I learn. Sometimes, I learn as I go along, and often I do so by the fantastic input from you readers. When you write me questions or comments – which I always encourage you to do – it happens that I discover mistakes that I have made. This exact thing happened to me this weekend.

I ran head first into a situation were I sat in front of my laptop and exclaimed “I am a moron…”. Apparently I have made a great mistake with my choice of Long Term Government Bond ETF. That mistake has also cost me money. So I have been a bit upset about it, but now all I can do is to repair it, and move on.

But with the transparency I like to keep here, I can only hope that at least you would not repeat my mistake. I can be excused for my trial and error, but you cannot claim the same thing now that I share what went wrong. Do as I say not, as I do. And be careful when you blindly trust strangers on the internet to have all the right answers, I am here to inspire and entertain. 😉

So what went wrong? Basically, when I did my updated selection in ETFs back in January, I made the mistake to simplify too much, in a way that I missed the reason for having Long Term Treasury Bonds.

As I wanted to simplify, I excluded my American Treasury Bonds ETF and instead bought one with global exposure. The one I got instead, had some bonds in Japan, in Europe and some in the US. However, one key thing to remember, and the reason for why Treasury Bonds can work as a safe haven, is that when times get tough, like during the Covid-19 outbreak, investors will be selling stocks and buying liquid bonds. Investors are also looking to hold assets in a liquid currency in such a situation, and that currency is US Dollars.

This means that to achieve the hedge with Government Bonds, you should hold Long Term US Treasury Bonds, I have learned. Actually, I knew this in theory as well, but somehow forgot it. At least I was gently reminded of it now in the crisis.

To show you the impact of my mistake in having the wrong sort of Government Bonds, take a look at the summary below.

The ETF that I owned previously and sold in January, is the one marked with the orange rectangle in the middle. The one I current hold is the one furthest to the right. Let’s compare development.

For your reference, the data is picked from Morningstar on 5 April 2020.

This shows that the past month, having the “right” ETF, would have yielded me 12.21%, while I only got 2.32% by also holding other countries’ bonds than the US. On a Year to Date basis, the difference is even worse for me: 29.26% vs. 7.23%. Damn!

But what can you do? As long as you learn, it is not lost money – just an investment for new knowledge. What I’ll do is that I will switch these ETFs back as they should be, even though it may mean that I am buying the iShares $ Treasury Bd ETF at the worst time, but it is what it is. At least I will be well prepared for the next turndown in about 3-10 years.

Now I hope that you do not repeat this same mistake. And please continue to share your comments and questions – often it leads to good discussions, and, as in this case, a valuable opportunity to learn.


That is all I had in store for this time. It has been good therapy as always to reflect and share what is going on with my investments, and I hope you got something good out of it.

Thinking about the current conditions on the financial markets, I’d be very curious to hear about your experiences. Have you been taking on too much risk, or how have your portfolios withstood the past months? Let us know in the comments, and if you have discovered any mistakes on your own, share them! Learning from each other is a great thing.

All the best until next time, and I really hope that you and your loved ones will be staying safe and healthy,
Nicholas


Book Tip: The All Weather Retirement Portfolio: Backtesting and Time Proven Strategies

Can’t get enough and want to read more about the All Seasons Portfolio Strategy?

Take a look at the book All Weather Retirement Portfolio, which is a great summary of the strategy with a short explanation of why it does the trick. Here, Bridgewater Associates shows the data and statistics for how the All Weather Portfolio Strategy works, how small the drawdowns are in comparison to stock indexes and the reasoning behind the splits.

So if you haven’t already adopted the All Seasons Portfolio Strategy, now, with the current bear market, you may have been convinced? In that case, begin with this short book with good compact content to get started.

(Affiliate links for Amazon)

Buy it on Amazon.com

This Post Has 8 Comments

  1. Hallo Nicholas. It hurt to say, but in my opinion the covid19 crisis is the defeat of risk parity strategies on which the all weather portfolio is based. The crisis showed that everything goes down when there is a liquidity crunch caused by the crisis. Long term bonds and gold were not usefull. They went down as stocks did. Also Tips had a huge down, not speaking about emerging market bonds (although you do not have them they are is the all weather portfolio). It is true that now gold and bond are going up, but also stocks. I thought all weather portfolio was an allocation that in every market condition makes money or at least loses not much. The price I pay for it is was less return than more aggressive asset allocation. Crisis is showing this is not true because everything went down. Of course the portfolio loses less than sep in crisis, but it also will gain less when stock will ramp. I would like to share your opinion. Thanks

    Ps: the book on your link is not the Ray Dalio’s one. Is it the right one?

    1. Ciao Carlo,
      I can’t say I agree with you that the corona crisis has killed the All Seasons Portfolio.
      Of course, the purpose is not to achieve risk parity every day, i.e. that if the stock market goes down one day, bonds and gold would automatically go up. If you wan’t that, you would need to work more with options.
      On the other hand, it does work over slightly longer periods, while still in the short term. Let’s take gold as an example, as you mentioned. In the beginning of the crisis when the drops on the stock market were steep, you are right in that gold fell as well in price. But, after having been sliding for two weeks, the gold price recovered the most of that loss in just two days by 23 March.
      And if you compare YTD figures for stocks and government bonds, they are more or less inverse. Both of these numbers are included in the post: 29.26% increase for 20+ Treasury Bonds and -19% for the S&P500. So basically, if you would have done your rebalancing the past weeks, you would be pretty well off while still being exposed to less risk than on the stock market. Whether the bottom on the stock market is behind us, however, remains to be seen.
      All in all, I think the strategy still works, but you would need to zoom out a bit to see the perks. And take the opportunity to rebalance the portfolio during these extreme events to be able to profit of the bounce back.
      Nicholas

  2. Hi Nicholas! Thanks a lot for this blog post. I’m about to start investing around $2000 a month and I’m looking for the right asset allocation strategy. I really like the All Seasons portfolio from Ray Dalio. I’ve run some numbers and it seems it holds the value pretty well, especially if you invest everything at once. However, I’m not sure if it’s best strategy if you invest on a regular basis. I think in that case a person might be better off with something like typical 70/30 strategy because you will be buying stocks all the time even in a crisis for a discount price and you will make the most of the bull markets. And since I’m going to start buying in the middle of this crisis I think it will still be quite profitable even when the next crisis come. What do you think?

    1. Hi Tomas,
      Thanks a lot for the kind words!
      One key aspect to remember about what makes the All Seasons Portfolio work, is the continuous rebalancing of the portfolio. I.e., that when some assets have increased in value relative to another, you sell what you have too much of and buy what you have too little of. My personal approach here, is that I add new funds on an (almost) monthly basis and buy those assets that I have too little of. This way, I feel I get around that dilemma, and it works for me to get the good effects from the strategy. As you say, “dollar cost averaging” as I understand it is called in the US, by monthly buys, will limit the risk as long as you keep adding funds also during times of crisis (now, for example). However, one can argue that the same is achieved with the All Seasons Portfolio but that you will be buying what is ‘cheap’ at the time. For example, today, you might be buying stocks and commodities, while in six months you might be buying long-term government bonds.
      As for thinking about the next crisis, in my opinion it is extremely hard to anticipate and predict how one will react emotionally and psychologically. When the values of one’s stocks fall by 30-50% in a month, that will be painful. This is difficult to prepare for mentally, and it is easy to now say to oneself that “it will be fine”. However, with an All Seasons Portfolio, the losses will be limited.
      I am currently working on some numbers for an All Seasons Portfolio approach to be published later, where I compare two different All Seasons Portfolio setups (unhedged US bonds and EUR hedged US bonds) and how they have developed YTD until now in April. These two are up 7% and 4% respectively YTD with sharpe ratios of 2.3 and 1.4. Compare that as well to S&P500 which is down -10.8% in the same period. Once this text is published, I will announce it here on the blog and via email in the newsletter.
      Bottom line is, I will maintain the All Seasons Portfolio strategy while buying monthly, but I haven’t compared it long term against a 70/30 strategy. But, a 70/30 will give you more volatility and risk, and in the end, for similar yield.
      All the best and stay safe,
      Nicholas

  3. Ciao Nicholas,
    a question about your strategy. TIPS seems to get part of a share that in the “classical” Dalio portfolio is taken from Long Term Bonds, I’m curious why you have chosen “iShares Global Inflation Linked Govt Bond UCITS ETF” and not something like “UBS ETF – Bloomberg Barclays TIPS 10+ UCITS ETF (USD) A-dis (EUR)”, I’m referring about the “long term” part and not on the Treasury vs Global Bond part that you have thoroughfully covered in the post. Thanks Giuseppe

    1. Ciao Giuseppe,
      Thanks for your comment.
      I wasn’t able to find the ETF you referred to, is this a EUR hedged one or just trading in EUR? Perhaps you could provide the ISIN to help me find it.
      Currently, I have a global TIPS ETF, as I have though that I do not only want exposure to US inflation, but also for Europe as well. During the coronavirus crisis, I have seen that a All-World TIPS ETF has moved in the same way as a US TIPS ETF that is EUR hedged (+4% YTD). Eurozone TIPS ETFs have had negative return (-5%) while non-hedged US TIPS have had the best outcome (+11%). That ETF is the iShares USD TIPS UCITS ETF (IE00B1FZSC47) with a duration of about 8.5 years, which I have been considering switching to, based on the same logic as I have described in this March post. However, it is important to remember that this has gone up in value due to that we are in a season of low economic growth – not in a season of high inflation, so now, typically American bonds perform better. Therefore, I have been reluctant to make the change from my All-World TIPS ETF to the US TIPS ETF, because as Europeans, we are more exposed to the inflation here in our vicinity.
      You wondered about my TIPS ETF, the iShares Global Inflation Linked Govt Bond UCITS ETF (IE00B3B8PX14), the effective duration for the bonds in the ETF is more than 12 years, so fitting the criteria of Long-Term Bonds. You can see this by scrolling down a bit on the Morningstar page.
      Hope this helped, and thanks for reading!
      //Nicholas

      1. Ciao Nicholas,
        thanks for the reply. If you are interested the ISIN of the ETF I’m referring to is LU1459802754.

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