Contents of this month’s post include:
- How can you become a better investor from understanding how you play chess
- Monthly Update for April 2021 with a fresh set of charts
- Book tip: Adaptive Asset Allocation by Adam Butler, Michael Philbrick and Rodrigo Gordillo (link at the bottom of the post)
- In case you missed it: I’ve launched a shop for tools and resources (both paid and free) for easy portfolio management, all within the Google Spreadsheets framework
It is great to have you back for a new monthly update!
I hope you remain well and that you have started to witnessing the effects of the vaccination efforts first hand. Finally, we have started to see more and more people in our closest circles – family, coworkers, and friends – who have gotten the first jab, so hopefully we can soon start living again rather than only surviving.
But let’s not drag this out much further, as we have some ground to cover in this month’s post as well. This time, we will consider how you can benefit as an investor from understanding how your mind works, i.e. whether you are prone to be caught up by emotion or making thoughtless mistakes, and how to easily avoid them as an investor. Let us jump straight into it below!
Are you sure if your instincts align with your intended way of investing?
I am asking this because if there is a mismatch between what kind of person you are when it comes to your decision making and acting on new information on the one hand and your investment goals on the other hand, you will not reach your financial goals if you do not know yourself.
How your mind works and how you behave matters more than you think when it comes to investing, as it will impact firstly the investment strategy you chose, and secondly, how you implement and deviate from the strategy in new situations and changed market conditions.
Take the Covid-19 crash of March 2020 for example. Prior to that event, there was a rather predictable behavior of the market that we as investors could navigate with a fairly steady hand. We knew what to expect, even though there was some uncertainty in trade wars, Brexit etc. But we always knew more or less the direction the economy was heading.
Then came the pandemic and everything was turned upside-down. It became increasingly difficult to navigate the markets and if you did not have a clear plan already set for yourself, or your instincts were not on point, chances are that you would have made a lot of wrong decisions in the chaotic weeks when the market dropped more than 30% and then began rapidly climbing.
But regardless how good an investor you are or what instincts come naturally to you, if you know who you are as a person and how your mind works, you could prepare your strategy already in advance to be better equipped to face the challenges that financial markets can throw at you. Even an investor with less experience and bad instincts can succeed in tough times by setting up clear and good rules for how to behave and then rigorously stick to those rules, cutting out all emotion.
Rule-based investing with a well-diversified portfolio is an extremely easy way to continuously hit good results without great losses. And if you diversify also between asset classes, choppy markets can even be your friend when you rebalance the portfolio from well-performing assets to assets that are at their relative lows.
But how do you know what mind you posses and what instincts you have?
For me, I came to think of this article just a few days ago when I was playing a game of chess on my phone. I’ll admit I have recently watched Queen’s Gambit on Netflix (great show by the way!) and started playing a little just for fun.
What I quickly realized was that I could see a clear pattern in how I play chess that I found correspond with who I am as a person.
My take-away was that I play rather defensively, waiting for the opponent to make mistakes and find it go against my nature to make big offensive and sacrificing moves. But at the same time, I rarely lose pieces to dumb mistakes.
Comparing this way of playing chess and how I behave as an investor was a light-bulb moment for me. If you are at all familiar with the strategy I use for investing (the All Seasons Portfolio strategy, hence the name of the blog), I am sure you can also see that there is more than just one similarity with how I described my way of playing chess?
While it is no surprise for me that this is how my mind works and that this is who I am as a person, i.e. risk-averse, recognizing uncertainty, and preparing in advance for the eventuality of losses, I found the game of chess being a good way of illustrating for oneself what your instincts are and to use that to analyze how you work as an investor. I am sure that you too can see some similarities between these games, am I right (let me know in the comments)?
So, with the knowledge of who we are, how can we use this insight to become better investors?
Well, regardless if you are defensive, offensive, analytical or spontaneous, having that insight of yourself can help you improve as an investor.
If you notice that you often to your surprise lose valuable pieces by making a quick move without seeing all risks you but yourself at on the chessboard, chances are that you may be an investor who is also driven more by emotion and having a hard time sticking to a strategy, or in other words, that you have a hard time to follow through on your convictions for a longer period of time. This could harm your long-term results as an investor if you are quick to abandon a strategy for what is hot at the moment.
An example of such investors are those who in 2021 have invested in for example ARK Innovation ETF, Tesla, Gamestop, or Dogecoin lately, i.e. jumping onto what seems to be hot at the moment without patience to build a less risky portfolio over longer time. Great gains in a short period of time could be the reward with such a strategy, but there is also a huge risk for devastating losses.
So, if you know that you are naturally inclined to invest in this short-sighted way, a remedy is to write down clear rules for your portfolio and stick to them like your life depended on it (because, in fact, your future financial life actually does).
For example, base your portfolio on broad index funds, diversify between asset classes, balanced the portfolio based on a relevant metric (for example the relative volatility of the asset classes), and set targets for when to rebalance (annually, quarterly, if an asset deviates from its goal weight by x%).
When you have these rules written down for yourself, you are less likely to make stupid mistakes when shit hits the fan. If you would have had this kind of playbook ready in March 2020, you would have had much better odds clearing the difficult period as you could have relied on your rules rather than emotion when the stock market tanked.
Instead of selling off stocks in fear for further losses, you would have sold gold and treasury bonds at their top, and bought stocks when they were cheap, i.e. any investors wet dream (buy low, sell high).
So, to become a better investor and increasing the likelihood of good future financial fortune, just do two things today: play a couple games of chess to understand your instincts and behavior, and write down rules for yourself as an investor to better manage your portfolio and protect it from your emotions. Future crises will come, and paradigms will shift. The secret, which is not at all well kept, is to prepare instead of trying to predict.
It is thus important that you have a portfolio which balances the risk exposure to different environments. For me, the rules I have or myself is the All Seasons Portfolio strategy which I rebalance annually or when an asset deviates from its target weight by more than 30% (e.g. if stocks go from 30% of the portfolio to less than 21% or more than 39%). If you have not already built your own All Seasons Portfolio to really diversify your portfolio and balance your risk, I strongly suggest that you begin preparing for whatever market environment that may come as soon as possible, to better manage the risk and volatility in your portfolio, while still not forfeiting return. If you need inspiration, check out my post on How to get started with the All Seasons Portfolio strategy or check out some example portfolios.
April 2021 Portfolio Update
Now then, let us have a closer look at my portfolio for the past month.
Since the March 2021 update, there has been no activity in my portfolio, as I have not added any funds nor executed any transactions. The only transaction on my account in April was some incoming dividend from my VGWL (Global stocks ETF), but no trades done.
And considering the environment, I am quite pleased with just sitting still in the boat to avoid rocking it in these uncertain times. There is really no need to take any drastic actions these days as it seems sentiments could change from one day to another. I will remain happy to just tag along, as my YTD results are more than enough and on par with my aimed long-term average.
My increased exposure to commodities and gold remains intact and so far, the reflation trade looks promising. At least so far in the month of May inflation has been spotted on more investors’ radars when US inflation came in at 4.2% YoY for April. The market had expected 3.6%, so the actual number came as a big surprise, fueling a further increase in commodities and interest rates, putting downward pressure on stocks (especially growth stocks) and bond prices.
I still have a bit more crypto than I would have wished for in my portfolio, but there is little I can do about this right now, as there are certain limitations to the ETCs I am trading for BTC exposure. DEGIRO har a temporary limitations to buy more of these ETCs, and due to the unit size of the ETC I hold, I cannot sell anymore (only 1 unit is remaining).
Thus, I am standing between having too much crypto or nothing at all, and currently, I am enjoying being part of the ride. I am looking for alternative exchange traded products that can give me a better access here, and hopefully such ETPs are available on DEGIRO.
If you are looking to invest in Bitcoin or other cryptocurrencies directly instead of exchange-traded certificates, consider using Coinbase – the most trusted cryptocurrency exchange with more than 43 million registered users, where you can securely trade more than 30 different cryptocurrencies directly in your own wallet.
The last 12-month performance of my portfolio has been in line with my expectations, as you can see in the below data to the right. 10% annual return of an unlevered risk parity portfolio is exactly according to plan, and at less than half the volatility of the S&P 500.
The return of stocks looks incredible, but here you have the base effect to consider, as by end of March 2020, the S&P 500 was near its lowest point amidst the Covid shock. Hence, I am not particularly worried of lagging the S&P 500 at this time, when this is viewed with sober eyes.
With the above graph and data in mind, I am very happy with how the All Seasons Portfolio strategy is playing out for me. It is giving me exactly what I am after: same returns as stock market average but with much lower volatility.
Moreover, I am still beating a traditional 60/40 portfolio, which I think could be facing great issues providing decent returns going forward with both bonds and stocks being overvalued.
While Bitcoin was a strong performer in March, it has not kept up the pace through the month of April. Instead, it as been one of the worst performing assets of my portfolio, evidencing the volatility of this asset class. This is also the reason I only allocate a small portion of my portfolio to Bitcoin. Other cryptocurrencies have seen good performance lately though, especially Ethereum and Dogecoin, albeit the latter is a complete joke and nothing that can be sensibly invested in.
As stocks have performed rather well in April, albeit the increase in S&P 500 has now been driven by value stocks rather than growth stocks, VIX remains a weak performer, now in the mid-teens; and below 20 for the first time since before the Covid-19 crisis.
It remains to be seen though whether the stalling of growth stocks is only due to a rotation into value, or if it is a sign of coming weakness of stocks in the next few months. This could be a revenge for VIX if volatility on the downside would pick up again.
On the bond side, after yields have been crawling upwards for the first quarter of 2021, we saw a pause of this trend in April, and the 10 year treasury yield found a comfort zone around the 1.60% mark, below the 1.70 range by end of March.
This trend in US Treasury bonds can also be seen in the 3-month graphs of asset classes below, where the dark gold line for DTLE is in consolidation.
Touching on the reflation trade, commodities saw another great month in April with many commodities reaching decade highs. Lumber has been the greatest winner which is up 420% in one year, and with the spot price now trading around $1,650 in early May. But also copper, wheat and corn have been risen sharply in price, while energies such as crude is consolidating around the $65-70/barrel range.
Lastly, as usual, here is the table of my ETFs and the changes laid out in table form.
|IUS5||iShares Gl Infl Lnk Govt Bd UCITS ETF USD Acc||TIPS||€605.60||€600.16||-0.90%|
|DTLE||iShares $ Treasury Bd 20+yr UCITS ETF EUR Hgd Dist||Long-Term Government Bonds||€766.92||€780.78||1.81%|
|IGLE||iShares Global Govt Bond UCITS ETF EUR Hedged Dist||Long-Term Government Bonds||€633.39||€632.10||-0.20%|
|M9SA||Market Access Rogers Int Com Index UCITS ETF||Commodities||€409.40||€430.33||5.11%|
|VGWL||Vanguard FTSE All-World UCITS ETF USD Dis||Stocks||€1,417.05||€1,442.40||1.79%|
|VOOL||Lyxor S&P 500 VIX Futures Enhcd Roll UCITS ETF C-E||VIX||€124.41||€111.65||-10.26%|
Thank you yet again for following this blog, and if you haven’t done so already, make sure to subscribe to the newsletter via the form in the page footer, and to drop any comments you may have on the content with the comment section or via email to firstname.lastname@example.org. The greatest value I have received from upkeeping this blog is the fantastic conversations with great people, such as yourselves, about ideas on investing and strategies. Thanks for that!
Remember also to check out the Resources page which I will be filling up with useful tools and resources for managing an All Seasons Portfolio. If you have any suggestions for any particular spreadsheet or tool that you are after, let me know in the comments below and I will see what I can do to have it included.
I have also set up a Patreon site, to cover hosting costs, which reach a couple hundred euros annually. If you find any content here at all useful and feel that you can treat me for the equivalent of an espresso, read more about what this means on the Support page here on the website. My annual hosting bill for running the website is around EUR 140, so any support is extremely helpful, as the monetization of this blog is very limited.
We’ll catch up soon for the May update!
Book tip: Adaptive Asset Allocation by Adam Butler, Michael Philbrick and Rodrigo Gordillo
In a recent article I posted, I recommended three great books for better understanding risk parity investing. As a comment, a reader gave me a great tip for another useful book on the same topic, namely Adaptive Asset Allocation. Naturally, I immediately placed an order and received it last week.
Having only had time to come about half-way so far, what I can say already now is that it is very much worth the read. I find it easy to digest (chapters are short and concise, as well as easily understandable) and thought-provoking with good insights on how an investor should approach portfolio construction.
The authors are the guys behind ReSolve Asset Management, which is one of the few firms offering risk parity funds, such as the ReSolve Adaptive Asset Allocation ETF. They also publish a great variety of useful research on the area, which I recommend you to read as well – all available for free on ReSolve’s website.
By reading Adaptive Asset Allocation, you will learn how to build an agile, responsive portfolio with a new approach to global asset allocation
Adaptive Asset Allocation is a no-nonsense how-to guide for dynamic portfolio management. Written by the team behind ReSolve Asset Management, this book walks you through a uniquely objective and unbiased investment philosophy and provides clear guidelines for execution. From foundational concepts and timing to forecasting and portfolio optimization, this book shares insightful perspective on portfolio adaptation that can improve any investment strategy. Accessible explanations of both classical and contemporary research support the methodologies presented, bolstered by the authors’ own capstone case study showing the direct impact of this approach on the individual investor.
Financial advisors are competing in an increasingly commoditized environment, with the added burden of two substantial bear markets in the last 15 years. This book presents a framework that addresses the major challenges both advisors and investors face, emphasizing the importance of an agile, globally-diversified portfolio.
- Drill down to the most important concepts in wealth management
- Optimize portfolio performance with careful timing of savings and withdrawals
- Forecast returns 80% more accurately than assuming long-term averages
- Adopt an investment framework for stability, growth, and maximum income
An optimized portfolio must be structured in a way that allows quick response to changes in asset class risks and relationships, and the flexibility to continually adapt to market changes. To execute such an ambitious strategy, it is essential to have a strong grasp of foundational wealth management concepts, a reliable system of forecasting, and a clear understanding of the merits of individual investment methods. Adaptive Asset Allocation provides critical background information alongside a streamlined framework for improving portfolio performance.
Or check out other great books on the topic on the Book recommendation page.
Buy it today on Amazon (affiliate link):