Insights

Read more about the article Insights – Convex Returns: The Key to a Diversified Portfolio

Insights – Convex Returns: The Key to a Diversified Portfolio

Diversification is the fundamental feature of portfolio management and asset allocation, but is there more to it than just measuring correlation and calling it a day?

In this article, we look more closely into the concept of convex return relationships between assets, ensuring that diversifiers perform and thus protect against the drawdowns of other assets in the portfolio.

Convex diversification profiles play an important role in the All Seasons Portfolio for making drawdowns shallower and creating opportunities for earning rebalancing premiums.

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Read more about the article Insights – Has gold lost its status as an inflation hedge?

Insights – Has gold lost its status as an inflation hedge?

In 2022, inflation made its presence clear and undeniable. While it can be argued whether we experienced an inflation "surprise", investors were reminded of the importance of inflation hedges in their portfolios as stocks and bonds suffered.

Gold is one such inflation hedge, but he narrative in financial media has bashed its capabilities of protecting against inflation in 2022, as the gold price ($) was barely flat for the year.

In today's article, we will be reviewing whether gold has lost its appeal as an inflation hedge, or if it rather needs to be viewed from a different angle.

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Read more about the article Insights – Optimal Time to Rebalance a Portfolio and Rebalancing Timing Luck

Insights – Optimal Time to Rebalance a Portfolio and Rebalancing Timing Luck

The theory behind investing in a multi-asset portfolio is pretty straight forward when simplifying it. You select a diverse set of uncorrelated assets, assign target weights and then you're done. Not that tricky.

It is mostly the managing part of the investment process that is more challenging. First, you have to work on your conviction to stick to the strategy and remembering why you chose the strategy in the first place. Secondly, you have to deal with rebalancing the portfolio, as uncorrelated assets are guaranteed to develop in different directions with some assets zigging when others are zagging.

The topic of rebalancing is one which I find is underserved in the literature and one that I get most questions about. Usually, it is the theory behind a portfolio that is the most exciting to write about and which is the key topic that sells and attracts more clients. The science of rebalancing, however, is just something that is covered briefly, at most.

While I have been writing about portfolio rebalancing in the past, I have recently found renewed inspiration for this topic. That inspiration turned into this post, where we are looking more closely at rebalancing luck, and if there is an optimal time in a month to rebalance a portfolio.

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Read more about the article Insights – The Case for Gold in a Diversified Portfolio

Insights – The Case for Gold in a Diversified Portfolio

Gold is a popular investment due to its ability to hedge against inflation, low correlation with the stock market, and its relationship with real interest rates. Using modern portfolio theory and the efficient frontier, investors can find the optimal allocation to gold in their portfolios that balances expected returns and risk. However, the optimal level of gold allocation will depend on an investor's specific investment objectives, risk tolerance, and financial situation. Therefore, adding gold to a well-diversified portfolio can improve its risk-return characteristics, particularly during periods of market stress.

In this article, we explore gold as an investment and inflation hedge, and briefly touch on how it fared in the inflationary year of 2022. We further look at the current case for gold in terms of real interest rates, the M2 money supply, and discuss how the gold price performs relative to also other currencies than just the US dollar.

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Read more about the article Insights – Interest Rate Risk and Asset Correlations with Future Cash Rate Expectations

Insights – Interest Rate Risk and Asset Correlations with Future Cash Rate Expectations

"Is the All Seasons Portfolio strategy not working anymore?"

With an annual drawdown for such portfolios almost as bad as for the stock market YTD (S&P 500 currently being down 16% since 1 January, having briefly been below -20%), I am not surprised that I have been hearing this question more and more recently. Is this a bug or a feature?

The first seven months of 2022 can be illustrated by two major themes in terms of financial markets: a) significant underperformance of major asset classes such as stocks and bonds, and b) rising rates.

The latter constitutes one of two undiversifiable risks for investors, as when the cah rate rises, that impacts asset prices as returns of risky assets always compete with the return of cash.

In this article, we explore interest rate risk and how most major asset classes have correlated with the future cash rate expectations over the first seven months of 2022. We try to answer the question on if the All Seasons Portfolio strategy is broken, or if the playing field has been reset and that we can expect better performance ahead.

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Read more about the article Portfolio Update – January 2022 – Interest Rate Risk

Portfolio Update – January 2022 – Interest Rate Risk

January 2022 was a shaky month for capital markets, and this turmoil has continued into February as well.

Russia’s invasion of Ukraine’s and a severe violation of a free nation’s sovereignty has certainly caused much volatility on the markets. But the fact is that while conflict is leading to a changed world with a new world order, it is actually not the sole culprit for the turbulence we have seen at late.

Sure, the was has a great impact on commodity prices (more on that later), as, firstly, the sanctions limiting trading with Russian oil, takes a vast amount of barrels of oil off the market on a daily basis, which certainly will drive up prices.

But the fact is that the main driver of asset prices is not the war in Ukraine, but still the same story as has been told since December 2021, namely inflation and expected interest rate hikes.

Interest rate risk is an important type of risk to be aware of as an investor, as it affects stocks and bonds indiscriminately. That is especially harmful for investors only investing in stocks or using a "balanced" stock-bond portfolio.

We will therefore be taking a closer look at what it is and whether there is anything we can do as investors to protect our wealth and portfolios against it.

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