Insights

Read more about the article Portfolio Update – June 2021 – A study of risk parity portfolios against S&P 500 since 1927

Portfolio Update – June 2021 – A study of risk parity portfolios against S&P 500 since 1927

Earlier this week, I received a very good comment to the monthly portfolio update article which I published last month. In that article, I discussed how the stock market seems greatly overvalued based on several widely different indicators, measuring both listed stock’s earnings and assets, as well as market cap in relation to GDP.

Based on the indicators CAPE (Shiller's PE), Q Ratio, and the Buffett Indicator (market cap to GDP), future potential returns of the stock market over the next decade appear limited.

In the light of this, the question arises whether the All Seasons Portfolio would be a better choice, and how it has performed under similar conditions in the past when compared with the S&P 500. The comment reads as quoted here below and this is what I have set out to answer in this month's article.

We can anticipate that future returns of the stock market will be below what we have become used to in recent years based on these metrics, and the fact that returns 1) usually are clustered in a way that good years are followed by further good years and bad years are followed by further bad years, and 2) always regress to the mean (between 7-10% annually) and that the last decade has seen annual returns far above this level.

When acknowledging the current worrying state of the equity markets, it becomes relevant to further understand how the All Seasons Portfolio has performed versus the stock market under similar market conditions.

Instead, it is relevant to compare against 1) long-term performance over several decades, and 2) periods with similar conditions as where we are currently. To me, these are two extremely central questions to clarify, and that I wanted to have answers to as well.

Continue ReadingPortfolio Update – June 2021 – A study of risk parity portfolios against S&P 500 since 1927
Read more about the article 3 must-read books for better understanding Risk Parity Investing and the All Seasons Portfolio Strategy

3 must-read books for better understanding Risk Parity Investing and the All Seasons Portfolio Strategy

  • Recommendations for the 3 best books to start with for better understanding risk parity investing
    • The Permanent Portfolio by Craig Rowland and J.M. Lawson
    • Balanced Asset Allocation by Alex Shahidi
    • Risk Parity Fundamentals by Edward Qian
  • Reviews of each book below and suggested reading order
  • Which to pick if you are only going to read one

The isolation and restrictions of movement during the Covid-19 pandemic and the lockdowns and curfews have been challenging to say the least. How can you spend your time, in an effort trying to stay sane, when you no longer can travel, barely go to the office, and perhaps not even physically meet friends and family.

Now in March, it becomes one full year of the exceptional circumstances and measures to limit spreading of the virus. It has been a difficult year for all, but even worse for some directly affected by the worst thinkable consequences of the pandemic.

Risk parity investing is an established discipline among institutional investors and family offices. Of these, the most famous are Bridgewater Associates' All Weather fund was a pioneer of the field, and is only accessible to pension funds and high net worth individuals.

But the benefits of risk parity investing reach also retail investors - people who do not get access to Bridgewater's products - as most investors are easily swayed by the most recent developments on the stock markets not to be sufficiently protected against the effects of what changes in expectations of economic growth and inflation can do to a portfolio.

Reading is a pastime of successful investors, not only in quarantine, and if you are keen on setting up your own risk parity portfolio (it is very easy to do with widely available ETFs), you should begin by seeking information on this investment discipline in the form of literature.

To make the getting started phase a bit easier for you, in this article, I highlight three great books about setting up a balanced portfolio. They all describe asset classes included (mainly stocks, bonds, gold, and commodities), and, more importantly, the reason behind why each asset class is needed in a portfolio to protect against the changing seasons of the economy.

Continue Reading3 must-read books for better understanding Risk Parity Investing and the All Seasons Portfolio Strategy
Read more about the article 2020 Year in Review – Never Let A Good Crisis Go To Waste

2020 Year in Review – Never Let A Good Crisis Go To Waste

  • List of 3 best lessons from 2020 and the Covid-19 stock market crisis
  • Summary of the most popular articles in 2020 from the All Seasons Portfolio blog
  • Some predictions for 2021
  • My portfolio development and stats

This past year has been nothing like we imagined a year ago. Luckily for me, in my summary post of 2019, I was not bold enough to make any public predictions. But while I may have saved face, this past year has in many ways been a complete train wreck.

There are many negative memories that we will take with us from 2020, whereof most can be traced back Covid-19 and its impact on families, the elderly, employees, and businesses. Let us remember that the year has not only brought distress to financial markets and investors, but too many have experienced hardships in the form of personal losses like loss of a family member, loss of income, or have been severely ill in the virus.

Maintaining an investor perspective, as this is a blog about personal finance and risk parity investing, a famous quote by Winston Churchill comes to mind that I think should shape our mindsets and outlooks for 2021. After World War II, in connection to the forming of what would become United Nations, Churchill proclaimed, “Never let a good crisis go to waste”.

While our reality has been dire looking the past 12 months, and at times many things have seemed hopeless, there are still many lessons to be learned from the Covid-19 pandemic. Here, I will focus on such lessons from a personal finance and investing perspective.

Hence, before I review my portfolio, let me summarize three key lessons that I have identified from 2020 that are important to take away to the future. This way, we will be much more prepared for the next crises.

I remain a strong believer in that modern financial markets and macro settings are too complex for anyone to have a complete edge and make accurate predictions. Therefore, it is always much more important to admit to oneself that we cannot predict what will happen, but we can prepare.

Continue Reading2020 Year in Review – Never Let A Good Crisis Go To Waste
Read more about the article Insight – How to Improve Portfolio Performance and Risk-Adjusted Return with VIX ETFs

Insight – How to Improve Portfolio Performance and Risk-Adjusted Return with VIX ETFs

This post was originally published on the Patreon page on November 5th, 2020. https://www.patreon.com/posts/43569940  If you like the content I publish on this blog, I appreciate your support to cover hosting costs etc. Even small contributions are greatly appreciated.

Contents:

  • How all common asset classes had weak performance at the same time in March 2020 due to the Coronavirus crisis.
  • That the only asset class actually performing well in that time was VIX ETFs
  • What the VIX is and how you can use it as an insurance policy in your portfolio to protect against volatility, uncertainty and black swans,
  • How including only 3% of a VIX ETF in a risk balanced portfolio increased return, lowered volatility and increased the Sharpe ratio of an example All Seasons Portfolio. This is shown with an extensive case study through first half of 2020 and the 30 month period leading up to 30 June 2020.
  • All raw data on which the analysis, graphs and tables in this article is based on, are exclusively found in the Patreon version of this post. Support the blog to get access.

All assets under-performed in late March.

Do you still remember how different asset classes performed amidst the most urgent phases of the coronavirus crisis? Or have you intentionally suppressed those bad memories and only chosen to remember the recovery in assets such as stocks?

As a reminder, there was period from about March 10th to March 20th when every major asset class declined in valuer, regardless if they were biased to perform well in increasing or decreasing economic growth environments. Stocks and commodities had already fallen by then, but by March 10th, also gold, treasury bonds and inflation-linked bonds fell as well. Nothing managed to offset the declines in growth assets, and any balanced portfolio suffered.

While a risk parity strategy, such as the All Seasons Portfolio strategy, performed much better than the stock market or a 60/40 portfolio, the Covid-19 crisis caused a dent also in the All Seasons Portfolio. The All Seasons Portfolio even turned into negative territory on a YTD basis, even though it recovered rather quickly from that temporary dip.

[3,500 more words]

Continue ReadingInsight – How to Improve Portfolio Performance and Risk-Adjusted Return with VIX ETFs
Read more about the article Insight – Where does Real Estate investing fit in the All Seasons Portfolio?

Insight – Where does Real Estate investing fit in the All Seasons Portfolio?

  • Post author:
  • Post category:Insights
  • Post comments:4 Comments
  • Reading time:55 mins read

In this rather lengthy post, the following topics will be discussed:

  • In what economical environments are real estate biased to perform well (economic growth and inflation)?
  • Five ways of investing in real estate, regardless how much money you have
  • How to adjust your balanced portfolio when including real estate - a template for adjusting portfolios regardless of new asset class
  • A list of resources with some of the best books on real estate investing

There are numerous opportunities and strategies for making money by investing. The ultimate goal is always to achieve a combination of positive cash flow and value appreciation of your owned asset. It is just a matter of preferred strategy for the investor which dictates how you can grow your wealth.

With the All Seasons Portfolio strategy, you can achieve profits but with less volatility than on the stock market. This is achieved by having a balanced portfolio that is diversified between asset classes. Typically, those asset classes are stocks, long-term government bonds, inflation-linked bonds, gold and commodities, with the following allocation between them.

There are of course many more asset classes available than the five listed above. One extremely important such asset class is real estate, which is a popular investment object among investors. It is so attractive, because it offers profits in two ways: value appreciation of the property, as well as monthly cash flow from rental income.

In this deep dive article, we will be looking more closely at real estate investing - how you can get exposure to it and with how much capital - and how it fits into an All Seasons Portfolio. Let us first begin with the latter of these two topics by answering the question of what economic biases real estate have.

Continue ReadingInsight – Where does Real Estate investing fit in the All Seasons Portfolio?
Read more about the article Correction of my Portfolio – Ditching Intermediate-Term Bonds

Correction of my Portfolio – Ditching Intermediate-Term Bonds

It is time for a kind of blog post that I hope will be as few in number as possible, but which I fear are inevitable from time to time. I have corrected a mistake, and want to tell you about it.

In my All Seasons Portfolio, I have until 20 July 2020 (the time of writing this post) held a certain amount if intermediate-term treasury bonds, i.e. bond with a duration of less than 10 years. I have held this in addition to my long-term bonds (20+ years) as part of the bonds portion of the portfolio. The splits have been 10% intermediate-term bonds and 30% long-term bonds, out of the whole portfolio.

As I have come across new and better information, I have chosen to reconsider the decision to hold intermediate-term bonds. They are not a bad investment as such – on the contrary, they are good when considering the risk-adjusted return – but they do not suit the All Seasons Portfolio Strategy. 

Continue ReadingCorrection of my Portfolio – Ditching Intermediate-Term Bonds