2021

Read more about the article Portfolio Update – December 2021 – How Roll Yield Influences Bond ETF Performance In Rising Yield Environments

Portfolio Update – December 2021 – How Roll Yield Influences Bond ETF Performance In Rising Yield Environments

Recently, a lot of discussions have been revolving around government bonds and whether they are still a sensible investment even in a balanced portfolio such as the All Seasons Portfolio, now that yields are rising and the West could be facing geopolitical uncertainty.

When attempting to find answers on what to do with treasury bond investments, I began thinking about how roll yield could potentially be an important factor to consider when assessing bond returns. I will be explaining more in detail what that is further below, but I think you might find it interesting too how roll yield is likely to impact Long-Term Treasury ETFs like IS04/TLT (iShares $ 20+yr treasury Bond ETF) in a scenario when rates rise.

As I searched for more certainty what will happen with these investments, I sought to quantify the impact of roll yield. To achieve this, I modelled the returns by simulating 100 bond portfolios similar to IS04 in the event that rates would rise, and compare that return with a portfolio that does not benefit from roll yield to see the difference. The results were quite clear actually.

With this post, I am not attempting to convince you that investing in government bond is a good idea - I give no judgement in that. Rather, I share my observations and findings from my research about roll yield as a phenomenon, and you can use that information as you wish in your analysis. I hope it adds to your process.

Continue ReadingPortfolio Update – December 2021 – How Roll Yield Influences Bond ETF Performance In Rising Yield Environments
Read more about the article Portfolio Update – October and November 2021 – Strategic Rebalancing

Portfolio Update – October and November 2021 – Strategic Rebalancing

It is December, and this is a period when most investors usually end up overseeing their portfolio allocations to start fresh in the coming year, and preforming periodical rebalancing.

While most just rebalance mechanically back to the original asset weights, we will be looking at whether rebalancing can be carried out in a way that improves returns and minimizes drawdowns when compared to both buy-and-hold strategies, as well as periodical rebalancing.

Many investors – both retail investors investing their personal wealth, and asset managers with millions in AUM – usually employ calendar rebalancing of a portfolio. This could be the quarterly rebalancing of a mutual fund, or that the retail investor sits down annually for a few hours during the Christmas holidays ahead of the new year to rebalance the portfolio.

Such periodical rebalancing is built on the fundament of mean reversion. It essentially sells the winners of the past period, and buys the losers. Over time, this is from where a rebalancing premium is captured when your portfolio consists of several uncorrelated assets. All Seasons Portfolios are a typical such portfolio that benefits from the rebalancing premium.

However, Man Group has researched strategic rebalancing techniques that could mitigate drawdowns through more bespoke methods for rebalancing. Their discussed techniques cover both the periodical rebalancings, as well as mid-period rebalancing when assets’ weights in portfolios deviate by more than a predetermined amount (rebalancing spans).

The retail investor should therefore consider the implications of trend and momentum both for periodical rebalancing and ad hoc rebalancing when using rebalancing spans, and implement a strategic rebalancing approach to further improve risk-adjusted return by minimizing drawdowns and thus the overall portfolio volatility, and potentially capture additional percentage points of return from trend.

In this post, we will be looking at a few ways of how to implement strategic rebalancing for your portfolio. I will also especially highlight the ways I have taken strategic rebalancing to heart in my All Seasons Portfolio.

Continue ReadingPortfolio Update – October and November 2021 – Strategic Rebalancing
Read more about the article Portfolio Update – September 2021 – Why The 60/40 Portfolio Is Not Balanced

Portfolio Update – September 2021 – Why The 60/40 Portfolio Is Not Balanced

When it comes to the All Seasons Portfolio strategy, or any other risk parity strategy for that matter, one of the fundamental ingredients is how to allocate the capital between assets in the portfolio based on risk rather than capital.

Why this is important, or even why bother doing it at all, is a question I get quite often. I think therefore it is time to have a closer look at risk parity portfolio allocation principles. Here I mean the reason for why the allocation to the assets is based on their risk (volatility) rather than equal weight based on capital.

In this article, for a comprehensible description, we will be examining a simple two-asset portfolio to illustrate the importance of weighting assets based on risk rather than capital. For this example, I will be using a 60/40 Portfolio consisting of 60% stocks and 40% bonds, as this is popularly (and erroneously) considered as a “balanced portfolio”, and as this is a portfolio allocation strategy among both retail and institutional investors.

Continue ReadingPortfolio Update – September 2021 – Why The 60/40 Portfolio Is Not Balanced
Read more about the article Portfolio Update – August 2021 – Retail Investors’ Irrational Expectations of Risk Parity

Portfolio Update – August 2021 – Retail Investors’ Irrational Expectations of Risk Parity

What I have observed from discussions with retail investors who are not yet aware of the benefits of risk parity, is that there is a great misunderstand of the goals of risk parity, and incorrect expectations of what such strategies should provide.

When explaining what risk parity is, being a strategy that pieces together risk premiums and returns from a wider array of asset classes, but where the timing of the earned positive returns from each asset are spread out in such a fashion that during all economic regimes, some of the assets will see negative returns, but the positive returns of other assets will offset losses and provide your portfolio with an overall profit.

This means that through proper diversification, on a portfolio level you cancel out much of the volatility inherit in each of the individual asset classes, so that you get a much smoother ride with lower portfolio volatility, but can still expect equity-like returns over time. You should expect rolling hills and valleys rather than mountains and canyons.

But as I have alluded to in recent posts, even though the All Seasons Portfolio strategy and other similar strategies (Golden Butterfly, etc. for example) are rationally the best fit for most investors, during times when the stock market outperforms, it becomes difficult to see your neighbor get richer on the stock market while your safe portfolio lags.

This kind of underperformance fatigue sets you up for a great risk if you abandon the safe strategy for a high-risk strategy when the market crash (the one that you were protected against) occurs.

Continue ReadingPortfolio Update – August 2021 – Retail Investors’ Irrational Expectations of Risk Parity
Read more about the article Why Volatility Trend Tracking Matters And How To Optimize Your Portfolio Based On Inverse Volatility

Why Volatility Trend Tracking Matters And How To Optimize Your Portfolio Based On Inverse Volatility

As an investor who has adopted a risk parity mindset, and perhaps have implemented a portfolio following risk parity principles, such as the All Seasons Portfolio, I am sure you at least have a fundamental understanding of the importance of volatility.

In several articles, I have discussed why it is vital for retail investors in particular to decrease portfolio volatility, and using another term, to decrease portfolio risk. Otherwise, we risk not achieving our financial goals, if we would encounter bigger drawdowns than we can afford, or that we allocate too much capital to a single asset class such as stocks when such assets face a period of lagging returns.

So, if the question is "How can I reduce portfolio volatility", the answer is Risk Parity. Using these types of strategies and investing in several asset classes and allocating capital based on the asset classes' relative risk, you can significantly decrease the overall volatility of your portfolio, while still earning the risk premiums of each asset.

To facilitate management of risk of the different assets in a portfolio, and to implement a bottom-up risk parity approach for my stock exposure through an Inverse Volatility strategy, I have developed a Volatility Analyzer tool that also includes an Inverse Volatility Portfolio Optimizer. I first and foremost developed this for my own needs, which I will describe further below, but have found that it may be a useful resource also for you.

In this article, we expand on why tracking volatility is important and how it is easier to forecast than returns, as well as explain how my developed tool works.

Continue ReadingWhy Volatility Trend Tracking Matters And How To Optimize Your Portfolio Based On Inverse Volatility
Read more about the article Portfolio Update – July 2021 – The Two Most Important Risks For Retail Investors And How To Avoid Them

Portfolio Update – July 2021 – The Two Most Important Risks For Retail Investors And How To Avoid Them

With the recent strong positive trend in stocks and risk assets since April 2020, I have been thinking quite a bit about a couple risks that face retail investors and which have become more and more relevant now that I get a bit of vertigo from the S&P 500.

These risks are 1) the risk of us not reaching our financial goals by not managing our investment risk properly and 2) abandoning a safer strategy when we see others making more money with high-risk strategies.

I will discuss these risks more in details below and why they matter, and in particular why it is more urgent for retail investors to have understood these risks.

Namely, apart from institutions with more or less infinite investment horizons, we as retail investors are only active on the financial markets for a quite brief moment when you zoom out and consider all the history of investing.

And as we only get one shot at it (no do-overs), it is important that we get it right from the start. It is crucial to avoid making a mess of our investing careers that we cannot repair later.

I hope you find this text useful, and please share your thoughts in the comments or directly by email to nicholas@allseasonsportfolio.eu.

And as usual, the regular update of my All Seasons Portfolio(s) follows right after the month's special topic. July was a quite good month for me, and I have made a slight alteration of my portfolio, switching the TIPS ETF from a global one to one with longer-term US inflation-linked bonds.

But more of that to come. Now, let's have a look at a different way of defining "risk".

Continue ReadingPortfolio Update – July 2021 – The Two Most Important Risks For Retail Investors And How To Avoid Them