This post was originally shared on my eToro feed in 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.
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 (“ASP”) strategy I run here.
As you may already know, the ASP is a regime diversified portfolio that includes asset classes all individually biased to perform well in changes in economic growth and inflation expectations to offset losses of other assets in such environments, (for example commodities in inflationary booms; developed market stocks in disinflationary booms; long-term government bonds in disinflationary busts; and gold and inflation-linked bonds in inflationary stagnation).
The lion share of the profits of such a broadly diversified portfolio comes from a) risk premiums, and b) a rebalancing premium.
This is achieved by asset allocation being decided based on relative risk (volatility) rather than capital, with the result that the overall portfolio volatility is low (a third to half of that of the stock market), and there is less variability in annual returns around the long-term average.
A common question around this theme I get from investors, especially asked by not-yet-old ones, is why one should invest in a low risk portfolio. The less skeptical investors also add a question about where the ASP fits in one’s overall wealth allocations.
Let’s spend this post to address these questions. Firstly, as the portfolio volatility is lower, that means that we may not expect to replicate those 15-20% occasional annual returns of the stocks market, but on the other hand – and more importantly – we will also not experience that our portfolio loses 15-20% in any year either.
𝗜𝗻𝘀𝘁𝗲𝗮𝗱, 𝘁𝗵𝗲 𝗹𝗼𝗻𝗴-𝘁𝗲𝗿𝗺 𝗮𝘃𝗲𝗿𝗮𝗴𝗲 𝗿𝗲𝘁𝘂𝗿𝗻 𝗼𝗳 𝘁𝗵𝗲 𝗔𝗦𝗣 𝘄𝗶𝗹𝗹 𝗺𝗶𝗿𝗿𝗼𝗿 𝘁𝗵𝗮𝘁 𝗼𝗳 𝘀𝘁𝗼𝗰𝗸𝘀 𝗮𝗿𝗼𝘂𝗻𝗱 𝟳-𝟭𝟬% (𝘄𝗵𝗲𝗻 𝗹𝗲𝘃𝗲𝗿𝗲𝗱, 𝗮𝘀 𝗺𝘆 𝗔𝗦𝗣 𝗶𝘀), 𝗯𝘂𝘁 𝘁𝗵𝗮𝘁 𝘁𝗵𝗲 𝘃𝗼𝗹𝗮𝘁𝗶𝗹𝗶𝘁𝘆 𝗼𝗳 𝘁𝗵𝗲𝘀𝗲 𝗿𝗲𝘁𝘂𝗿𝗻𝘀 𝗯𝗲𝘁𝘄𝗲𝗲𝗻 𝘆𝗲𝗮𝗿𝘀 𝘄𝗶𝗹𝗹 𝗯𝗲 𝗹𝗼𝘄𝗲𝗿. The aim is to cluster each annual return around a mean, rather than experiencing a big spread. Think of this like an archer: it is better to distribute your arrows more closely around the bullseye in the center than all over the target with some arrows missing the board all together.
Hence, an ASP has trailed stocks in the 2010s during a market regime clearly favoring stocks, but over time, it will catch up as stocks catch a rout. Regarding where the ASP fits in your overall wealth management, I usually view it that personal finances can be compartmentalized into different segments, or three “buckets”. These buckets have different purposes and thus require different risk exposure. They include:
- 𝗘𝗰𝗼𝗻𝗼𝗺𝗶𝗰 𝗯𝘂𝗳𝗳𝗲𝗿 (zero risk or bank account for unexpected expenses in life)
- 𝗠𝗶𝗱𝗱𝗹𝗲-𝗿𝗶𝘀𝗸/𝗣𝗮𝘀𝘀𝗶𝘃𝗲 𝗯𝘂𝗰𝗸𝗲𝘁 (long-term savings with some risk that should grow your wealth in a decent pace, but not risking eroding it)
- 𝗛𝗶𝗴𝗵-𝗿𝗶𝘀𝗸/𝗦𝗽𝗲𝗰𝘂𝗹𝗮𝘁𝗶𝘃𝗲 𝗯𝘂𝗰𝗸𝗲𝘁 (where all the “fun” investments happen, such as cryptos, individual stocks etc.)
Can you guess in which bucket the core of your capital should be allocated?
It is wisest to build from the bottom. A house must have a stable foundation to stand on to avoid it falling in on itself. Thus, your should first be focusing on making sure you have enough buffer to cover everyday expenses, thereafter build a sizeable passive bucket, and only then be allocating a small portion of your wealth to speculation. This method is what will save your retirement one day, and something that may have saved you from distress already now in the first half of 2022.
𝗪𝗶𝘁𝗵 𝘁𝗵𝗶𝘀 𝗶𝗻 𝗺𝗶𝗻𝗱, 𝘁𝗵𝗲 𝗔𝗦𝗣 𝗽𝗿𝗲𝘁𝘁𝘆 𝗺𝘂𝗰𝗵 𝘁𝗶𝗰𝗸𝘀 𝗮𝗹𝗹 𝗯𝗼𝘅𝗲𝘀 𝗼𝗳 𝘁𝗵𝗲 𝗺𝗶𝗱𝗱𝗹𝗲-𝗿𝗶𝘀𝗸 𝗯𝘂𝗰𝗸𝗲𝘁 𝘄𝗵𝗶𝗰𝗵 𝘀𝗵𝗼𝘂𝗹𝗱 𝗺𝗮𝗸𝗲 𝘂𝗽 𝘁𝗵𝗲 𝗰𝗼𝗿𝗲 𝗼𝗳 𝘆𝗼𝘂𝗿 𝗽𝗼𝗿𝘁𝗳𝗼𝗹𝗶𝗼.
All of these parts are important for building wealth, and while it is easy to get carried away and allocating an unproportionally large part of your money in the speculative bucket, you should control your FOMO and play the long game.
Life – and investing – is a marathon, not a sprint, and you should secure the foundation of your portfolio first. While broad index funds also find their home in the passive bucket, they still carry the risk of sequential returns, i.e., that your are at the mercy of just the equity risk for your wealth.
The All Seasons Portfolio, on the other hand, diversifies away much of the equity risk by introducing more stability through adding a risk balanced allocation to different asset classes. It is smart to have an ASP as part of your core investments.
I do not think that the ASP should make up 100% of your portfolio in the same way as I do it on eToro – it is important to include the fun bets too and make investing more interesting than watching paint dry – but (and this is an important “but”), you should allocate at least a part of your capital to Popular Investors with stable risk parity portfolio of styles similar to the All Seasons Portfolio.
That way, you will always be able to sleep well at night also when the stock market and other risk assets don’t go your way, as you know you have a core investment to lean back on that adds stability.
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,
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.