Blog

This pot was originally shared on my eToro feed on 13 March 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.

The benefit of a systematic strategy – like the one I run here on eToro – rather than a discretionary strategy is that you don’t get in your own way when following rules that are proven to work.

Hence, by taking a trader/person with cognitive biases out of the equation, you increase the probability of success by avoiding mistakes caused by limits of the human brain.

It is intuitively hard to buy assets that are trending, as it feels more expensive by the day when the price goes up, and you tell yourself you will “buy the dip”.

The problem is that when that dip occurs, the trend may be broken and the asset is no longer an attractive buy. That is when our cognitive biases hinder us from success.

When we go against rules, we tend to make mistakes, as the rules were set in place for a reason.

A similar mistake can also happen the other way around, i.e. that we do not sell and take home profits of an asset that has been trending, and we may miss out on gains if the trend reverses, but we are stuck with a belief that it should continue up again.

This is the reason I will be strategically rebalancing commodities in the coming week.

Commodities ($DJP) have been in a strong positive trend for the past two years, and this has accelerated the past weeks with the war in Ukraine.

The result is that the allocation to commodities in my All Seasons Portfolio has grown far above its target allocation of 7.5% (previously 10%, but now adjusted for 2.5% carbon credits), and is now outside the 20% rebalancing span, as the allocation is currently at 13.75% (83% above aimed allocation; 37.5% above aimed allocation before introduction of carbon credits).

Commodities are in a positive trend, and while I (discretionarily) believe the positive trend to continue, it would go against my systematic rules to maintain such an overallocation to an asset class.

That violates risk parity rules, leaving me vulnerable for sudden changes in expectations. Hence, my rules tell me that a rebalancing should occur, i.e. that I should sell commodities, and therefore, that is what I will do.

But as I have discussed earlier, due to the positive trend, I will not be rebalancing commodities all the way back to 7.5%, but will follow my rules of strategic rebalancing, i.e. rebalance it halfway to the aimed allocation from the 20% rebalancing span, i.e. to 8.25%.

Thus, I will remain overweight, but well within the limits of my established rules.

In a similar manner, I will be adding on my Long-Term Treasury Bond ETF $TMF (3x exposure to $TLT), as this position is grossly underweight (12.45% vs aimed 17%).

That has been due to an expectation in rising rates, meaning that the ETF has been in a negative trend. Hence, I will not be rebalancing all the way back to the aimed allocation, but half way.

I expect this to make me better prepared for surprises in inflation and economic growth, and with that, I will have more stability with my All Seasons Portfolio.

To add more flavor to this, the market expects Fed to raise rates during their March meeting now on Wednesday from 0-25 to 25-50. Actually, the probability of such hike is estimated as 95% (see below image).

That means that a) a rate hike is already vastly priced into bond assets, and b) if the 5% probability of no rate hike occurs due to the war in Ukraine or other factors, that will likely have a positive impact on bond prices.

In other words, with a hike, most of the move to the downside has already happened, and if the rate is not hiked, there is more upside. Granted, there is also a small probability of a rate hike of more than 25bps, which would negatively affect bond yields, but I will stick to my rules.

With this communicated rebalancing, I will deliver on my promise to follow my systematic trading strategy with my All Seasons Portfolio, and I am sure you understand the reasoning behind this.

Let’s secure some profits from the last run in commodities, while still having a decent amount of chips on that table. 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.