All investments carry risk. Historic performance does not guarantee future gains. No content on this website constitutes financial advice, but are only my personal reflections and descriptions of my experiences.
Portfolio Update – October 2020 – U.S. Elections and Risk Off

Portfolio Update – October 2020 – U.S. Elections and Risk Off

  • Monthly portfolio update: Election jitters and a risk off sentiment in markets toward late October brought down most asset classes. Most losses have been recovered since.
  • Diversified risk parity strategies such as the All Seasons Portfolio will bring stability to uncertain times ahead
  • Book tip: The Permanent Portfolio: Harry Browne’s Long-Term Investment Strategy (link at the bottom of the post)
  • In case you missed it: My latest article about How VIX ETFs can improve portfolio performance and stability in volatile environments (Now available exclusively on Patreon; to be posted on this blog in late November 2020)

Hello, and great to have you back for a new portfolio update.

I hope that in these challenging times, you are staying positive and testing negative.

I can barely believe we are already in November – the darkest and gloomiest month of the year (here in Sweden it will now be cloudy, windy and murky for the next 2-3 weeks at least). And on top of it, the Covid-19 virus soon celebrates its 1 year birthday, and we are on the ninth month of working from home here, with renewed lockdowns all across Europe. It seems hard to find things to cherish about, but we’ll need to try our hardest to not let that affect us too much. I have just received a delivery from Amazon for two books on risk parity, which I will be burying myself in while autumn storms blow outside.

This past week I have spend a lot of my time in analysing how investing in VIX (CBOE’s Volatility Index) through a VIX ETF would have impacted a risk parity portfolio in the spring of 2020 and the Covid-19 crisis. As you may recall, all asset classes (including government bonds and gold) declined for 10 days in March, so I looked into if there were any asset class available that could have offset the losses in a distressed market.

I have summarised my findings in a 3,500 word article with 18 graphs about how a small portion of VIX (less than 5%) could have greatly increased both absolute return and Sharpe ratio in the crisis. I will make this post available here on the blog in late November, but you can already now read it in full on my Patreon site.

Why do I use Patreon? I will make all content available on this blog, but will at times give pre-access to those supporting the blog on Patreon. To keep this blog up and running, my hosting costs for the website is currently €12 per month. In an attempt to cover the expenses, I opened up a way for returning readers to support my work and times spent on writing articles for the equivalent of a cup of coffee or espresso per month. If you want to contribute, just head over to www.patreon.com/AllSeasonsPortfolio. All contributions, no matter the size, help and are greatly appreciated.

What else? Oh yeah, there is an election going on in the U.S. It seems like it will be ongoing for quite some time unless Trump concedes and does not dispute the results through the courts. How likely would that be? Potentially, this will be a wet blanket over the markets in the short term until a winner is ultimately decided.

Many ETFs (investing in American stocks and Treasury bonds) saw great outflows in the days before elections as investors sought to decrease their exposure in a risk off move.

The VIX (the “Fear Index”) jumped from the high 20s to 40 in the week before the election, as the market anticipated election uncertainty. When more and more election results from states have been reported, the VIX has come down again to pre-election levels. With Biden (the current leader at time of writing) at the steering wheel, further stimulus is likely which would make markets steam ahead. Albeit a split Congress would be a healthy road block against the Democrats’ wishes to constrain financial markets with unfavourable regulation. Still, the outcomes are uncertain, and we will just have to sit tight to see where we land.

After election, Brexit talks will come up again. It seems the UK side may have slowed down negotiations with the EU on a trade deal to wait for US election results (BBC). Depending on who holds the White House, UK’s possibilities for a cross-Atlantic trade deal differ. Thus, the UK negotiators want to see what horses to bet on in the talks with the EU depending on their fall back plans for trade deals with the former colonies.

Bitcoin has also reached it highest level since 2018, and as I know many of you readers have part of your portfolio allocated to crypto, I can only say: good job! Do you think this rise will continue, and if crypto is developing (or has already developed) into a mature asset class that can actually work from a risk parity perspective? For such purposes, I believe it needs certain predictability when considering the assumed volatility and growth/inflation biases. As I am yet to learn more, it would mostly be speculation from my side to take a bet, but that said, I am considering taking a small bet as an insurance policy. But I would like to do that based on sounds underlying trend rather than FOMO.

With all this uncertainty we have ahead of us, which asset class do you think will perform best during the month of November 2020? Cast your vote here, and feel free to reflect in the comment section further below, especially if you select “Other”.

What will be the best performing asset class until 30 November 2020?
6 votes
VoteResults

Portfolio Update October 2020

Let us now turn our attention to the portfolio performance in October.

This past month has been rather eventful on financial markets with both the US election and a second wave of the coronavirus hitting both Europe and the US.

S&P 500 in October 2020

As similar story is told by Long-Term U.S. Treasury Bonds. Yields have increased over the month when investors have preferred cash, pushing down the value of the bonds. This trend, on the other hand, has helped the USD to recover some of its weak performance the last 6 months, as a sell-down of assets, increases demand for the U.S. currency. I believe that currency trend to only be temporary, as after the elections, investors will reverse the sell off and get back in riskier assets when there (hopefully) is more certainty in the markets.

30Y Treasury Yields in October 2020

It appears no asset class managed to offset the market jitters by late October. Also gold, no matter in what currency you look at it from, saw a sell off toward the end of the month. However, after election day, gold price has bounced back above USD 1,950/oz. During the weekend of 7-8 November, Biden has been announced as the president-elect, why more stability may be expected on Monday when markets open. This could push stocks up, and gold and Treasury bonds down.

Gold price in USD in October 2020
Gold price in EUR in October 2020

But only because the U.S. presidential election (or at least voting for electorates) may have been behind us, does not mean that we will be in a certain place. If you want a greater understanding on how the presidential election works with all its steps from election day until inauguration day, listen in to the latest episode of Macro Voices (episode #244), where the host and hedge fund manager Erik Townsend describes how we are still not out of danger. As a bonus, you will in this episode hear more about how gold may be in a secular bull trend, which is indeed interesting information for you who manage your own risk parity portfolio.

And what would it mean for the economy and for inflation with Biden in the White House? What we need to bear in mind is that Trump will remain power for another two months, and during these two months we will see how the second wave of Covid-19 develops. Biden is a greater believer in taking actions against the spread of the virus, which may result in further lockdowns once he is in office. That may harm American economic growth, depending on the extent of such lockdowns.

Democrats in general are also bigger believers in stimulus – especially stimulus checks to households – and Modern Monetary Theory (MMT). With increased money printing, the probability of higher inflation becomes more likely. I will thus consider switching to EUR hedged versions of certain ETFs to counter any potential losses in the USD’s purchasing power.

However, I do not believe we will see inflation straight away, but only after we have passed the culmination of the pandemic when economic growth is back for real. When that will happen, is currently extremely hard to predict: will we see third and fourth waves? Will the virus mutate, as is feared is happening in Denmark’s mink population? How long will it take for a good enough vaccine to be available for a great enough part of the global population?

In this light, I believe that in the short term, we may first witness disinflation and even deflation, mostly due to another potential decline in economic growth, before things turn. I will thus keep my allocation to inflation protective assets, but keep my TIPS share low, as they do not perform well in deflationary environments, and instead rely on commodities and gold. (Compare with RPAR ETF’s rule based strategy around this in their 2020 Q3 presentation)


Looking more closely at my portfolio, since my September 2020 update the overall portfolio is more or less similar, but with some shifts between assets. Looking back, this has in fact been the case since April, where the portfolio moves in a tight span. It is comforting to use a risk well-diversified parity strategy such as the All Seasons Portfolio strategy to be prepared for whatever the market throws at us.

I have in the beginning of November, for the first time in a while (due to purchase of a home) added some funds into my portfolio again. This will, however, only be visible in next month’s update, and these funds still remain in cash after the first weekend after the US elections anyway.

Portfolio allocations remain as they have been for a while. With the low yield on US Treasury Bonds, I have kept this portion slightly underweight. If I were to increase, due to expected deflation of disinflation, or risk-off environments, I will top off my Existing IS04 (Long-Term US Treasury Bonds) with DTLE (same but with EUR hedge). Eventually, I will switch over all my LT Treasury Bonds to EUR hedged versions to minimize currency risk. Even though my home currency is still SEK (Swedish Krona), in my life, I am more closely exposed to Europe and EUR than the United States and USD.

As I believe that the longer-term effects of the stimulus packages and MMT will be inflationary, I keep my Gold and Commodity holdings at a higher share of my All Seasons Portfolio than aimed allocation. Here, a EUR hedge on asset will make a difference as well, but it will also depend on whether European countries follow suit and keep the money printers humming as well.

By end of October and beginning of November, most assets have declined in a general risk-off and deleveraging environment ahead of the US elections. This has impacted prices across all asset classes with outflows in all kinds of ETFs, driving prices down. As my portfolio is mainly exposed to the US, at least for the bond parts, I have not been able to avoid being impacted by this sentiment.

As a result, my portfolio development in October has been -1.6%, with declines in all asset classes except for Inflation-Linked Bonds since end-of-September.

The same story is visible in the below YTD graph.

Lastly, here’s a view of the ETFs in my portfolio, and the performance of each during the last month, in table form.

ETFClassISIN2020-09-302020-10-31Change
iShares Global Inflation Linked Govt Bond UCITS ETFTIPSIE00B3B8PX14€604.72€608.720.66%
iShares USD Treasury Bond 20+yr UCITS ETFGovt Bond LongIE00BSKRJZ44€1,276.74€1,252.14-1.93%
Market Access Rogers International Commodity UCITS ETFCommoditiesLU0249326488€320.85€318.78-0.65%
Xetra GoldGoldDE000A0S9GB0€468.18€466.92-0.27%
Vanguard FTSE All-World UCITS ETFEquityIE00B3RBWM25€1,272.64€1,244.80-2.19%
Total€3,943.13€3,891.36-1.31%


Many thanks for your attention, and in case you missed it earlier this fall, I published a great post about real estate investing and how it fits in the All Seasons Portfolio strategy. Here is a link to the post if you look for any further reading.

And sit tight for a great read on VIX ETFs and how you can use them to insure your portfolio against black swans, severe risk-off sentiment, and increased volatility. That article will be posted sometimes in late November here on the blog, so make sure to subscribe to the newsletter so that you do not miss it. And if you can’t wait, it is already available on my Patreon site. There you will also get access to the raw data, which is something I won’t be making available anywhere else.

Thank you so much for your attention, and I hope you leave a comment about your portfolio development and especially what asset class you think will be the best bet until the next monthly update.

I have also set up a Patreon site, to cover hosting costs, which reach a couple hundred euros annually. If you find any content here at all useful and feel that you can treat me for the equivalent of a double-espresso, read more about what this means on the Support page here on the website. I have a hosting bill of around EUR 140 falling due in November, so any support is extremely helpful, as the monetization of this blog is very limited.

Remember to subscribe to the newsletter at the footer of this page, to make sure you receive notifications when a new article is posted (no spamming of other unwanted content).

Looking forward to hearing from you,
Nicholas Ahonen


Book tip: The Permanent Portfolio: Harry Browne’s Long-Term Investment Strategy

I just received this book in the mail, and it is next up on my reading list. Even though it does not cover the All Seasons Portfolio per se, I consider it to be popular reading material for anyone interested in Risk Party investing. It provides an up close look at an investment strategy that can handle today’s uncertain financial environment

Market uncertainty cannot be eliminated. So rather than attempt to do away with it, why not embrace it? That is what this book is designed to do. The Permanent Portfolio takes you through Harry Browne’s Permanent Portfolio approach–which can weather a wide range of economic conditions from inflation and deflation to recession–and reveals how it can help investors protect and grow their money.

Written by Craig Rowland and Mike Lawson, this reliable resource demonstrates everything from a straightforward four-asset Exchange Traded Fund (ETF) version of the strategy all the way up to a sophisticated approach using Swiss bank storage of selected assets for geographic and political diversification. In all cases, the authors provide step-by-step guidance based upon personal experience.

  • This timeless strategy is supported by more than three decades of empirical evidence
  • The authors skillfully explain how to incorporate the ideas of the Permanent Portfolio into your financial endeavors in order to maintain, protect, and grow your money
  • Includes select updates of Harry Browne’s Permanent Portfolio approach, which reflect our changing times

The Permanent Portfolio is an essential guide for investors who are serious about building a better portfolio.

For anyone interested in the All Seasons Portfolio and Risk Parity investing, I find this a great read as you enhance your understanding for both the vulnerabilities of the economies (ref. discussion above on credit ratings) and government bonds. Or check out other great books on the topic on the Book recommendation page.

Check it out today on Amazon (affiliate link):

Buy it on Amazon.com

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