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eToro Post – How Strategic Rebalancing Helped Avoid a -35% Loss in Long Treasury Bonds

This post was originally shared on my eToro feed in May 2022. Make sure to follow me there as well, and did you know that you can copy my trading there for free? Create an account today, copy my portfolio by searching for user “Allseasonsport” to automatically duplicate my All Seasons Portfolio strategy effortlessly.

Since I joined eToro in April last year, I have been sharing insights and observations about investing with risk balanced strategies such as the All Seasons Portfolio strategy which I run here. As eToro is a social trading platform, I from time to time share content in my eToro feed, which I then share on the blog in posts like this.

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Trade stocks, crypto and ETFs listed on 14 exchanges on eToro. You can copy my portfolio by searching for user Allseasonsport

As part of my All Seasons Portfolio, the asset classes have a set aimed allocation, which is based on their historical volatility and correlations and biases to different economic regimes.

The rebalancing between the uncorrelated assets earns a portfolio an extra premium on top of each assets inherent risk premiums. In addition to regular scheduled rebalancing, a common strategy is to apply rebalancing spans. This means that when an assets weight deviates from its target weight by a set percentage, this triggers a rebalancing.

For my All Seasons Portfolio, I have set such span at an optimal 20% level, which is a level that captures trend and momentum as an asset is allowed to run in a direction before rebalancing. However, additional layers of strategic rebalancing can be applied, which I discussed more in depth in an earlier post from December 2021 about Strategic Risk Management. The types of strategic rebalancing rules that I apply in my portfolio management and asset allocation are a) delay in rebalancing during persisting trends, and b) rebalancing half-way to target allocation during a persisting trend.

Now, we have gotten a live example of how strategic rebalancing has worked in our favor, and I thought I would share this with you.

A key part of a broadly diversified risk parity portfolio is long-term treasury bonds. They offer a protection against disinflation and stagnating growth, regardless a low-rate environment. TLT, being the iShares 20 year+ Treasury Bond ETF, is the most common ETF that gives exposure to this asset class, but to achieve portfolio leverage, on eToro I use the 3x levered variant in TMF for which the target allocation is 17%.

Target Asset Allocation for my All Seasons Portfolio on eToro (note that this shows gross allocation to ETFs, not net exposure due to the use of a levered bond ETF).

The past months, we have witnessed a rising rate environment and the effects of interest rate risk. During this time, long rates have been rising, meaning that Treasury Bonds ETFs have been falling. See the attached images that depict the 20Y yield and the development of TLT the past 12 months. In this decline, my 20% rebalancing span for TMF was reached on 9 March 2022 when its weight amounted to less than 13.6% of the portfolio.

But, as the asset was in a clear negative trend, due to the strategic rebalancing approach implemented in my systematic way of trading, the rebalancing was postponed until the trend was neutralized.

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Trade stocks, crypto and ETFs listed on 14 exchanges on eToro. You can copy my portfolio by searching for user Allseasonsport

On 25 May, as the negative trend has (at least temporarily) neutralized, meaning that rebalancing halfway to the target allocation was carried out. Current allocation post-rebalancing is 14.7% versus the aimed 17%, which could be compared with the previous allocation before rebalancing of 12.5%.

On 9 March when the rebalancing span was reached, the price of TMF was 21.68. When I actually proceeded with the half-way rebalancing on 25 May, my order was filled at 14.12. This means that through strategic rebalancing, I avoided a loss of -35.2% on a position I would have taken if the rebalancing would have been carried out already in March.

That would have corresponded to a loss on a portfolio level of 2.5 percentage points.

It is always difficult to predict whether 3.43% yield on the 20Y Treasury Bonds (3.14 for the UST10Y) reached on 6 May 2022 is a top in yields for this time, or if we are just seeing a pause before another leg up.

But at least, we have avoided a loss from the last 3 months, and have only rebalanced half-way to target to further manage the risk arising from the uncertainty.

Thanks for your attention, and I hope you enjoy these occasional updates and insights about mechanics of my strategy.

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Trade stocks, crypto and ETFs listed on 14 exchanges on eToro. You can copy my portfolio by searching for user Allseasonsport

You are more than welcome to stick around for this journey that I have been on for several years already with this strategy, and I look forward to interacting with you along the way. And make sure you look up my profile on eToro, if you haven’t already.

All the best,
Nicholas


The opinions shared in this article are those of the author and do not constitute investment advice in any form. Any mentions of my trading strategy are for descriptive and information purposes only of what I do with my money. All investments carry the risk of capital loss.

This post includes affiliate links for eToro, and by clicking the links, I may get a compensation, at no extra cost or disadvantage for you. On eToro, the trading on my account is done with my own money, and if you chose to copy my trading, I have skin in the game and incentives to stick to my strategy and perform well.

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