All Weather Portfolio

Read more about the article 3 must-read books for better understanding Risk Parity Investing and the All Seasons Portfolio Strategy

3 must-read books for better understanding Risk Parity Investing and the All Seasons Portfolio Strategy

  • Recommendations for the 3 best books to start with for better understanding risk parity investing
    • The Permanent Portfolio by Craig Rowland and J.M. Lawson
    • Balanced Asset Allocation by Alex Shahidi
    • Risk Parity Fundamentals by Edward Qian
  • Reviews of each book below and suggested reading order
  • Which to pick if you are only going to read one

The isolation and restrictions of movement during the Covid-19 pandemic and the lockdowns and curfews have been challenging to say the least. How can you spend your time, in an effort trying to stay sane, when you no longer can travel, barely go to the office, and perhaps not even physically meet friends and family.

Now in March, it becomes one full year of the exceptional circumstances and measures to limit spreading of the virus. It has been a difficult year for all, but even worse for some directly affected by the worst thinkable consequences of the pandemic.

Risk parity investing is an established discipline among institutional investors and family offices. Of these, the most famous are Bridgewater Associates' All Weather fund was a pioneer of the field, and is only accessible to pension funds and high net worth individuals.

But the benefits of risk parity investing reach also retail investors - people who do not get access to Bridgewater's products - as most investors are easily swayed by the most recent developments on the stock markets not to be sufficiently protected against the effects of what changes in expectations of economic growth and inflation can do to a portfolio.

Reading is a pastime of successful investors, not only in quarantine, and if you are keen on setting up your own risk parity portfolio (it is very easy to do with widely available ETFs), you should begin by seeking information on this investment discipline in the form of literature.

To make the getting started phase a bit easier for you, in this article, I highlight three great books about setting up a balanced portfolio. They all describe asset classes included (mainly stocks, bonds, gold, and commodities), and, more importantly, the reason behind why each asset class is needed in a portfolio to protect against the changing seasons of the economy.

Continue Reading3 must-read books for better understanding Risk Parity Investing and the All Seasons Portfolio Strategy
Read more about the article 2020 Year in Review – Never Let A Good Crisis Go To Waste

2020 Year in Review – Never Let A Good Crisis Go To Waste

  • List of 3 best lessons from 2020 and the Covid-19 stock market crisis
  • Summary of the most popular articles in 2020 from the All Seasons Portfolio blog
  • Some predictions for 2021
  • My portfolio development and stats

This past year has been nothing like we imagined a year ago. Luckily for me, in my summary post of 2019, I was not bold enough to make any public predictions. But while I may have saved face, this past year has in many ways been a complete train wreck.

There are many negative memories that we will take with us from 2020, whereof most can be traced back Covid-19 and its impact on families, the elderly, employees, and businesses. Let us remember that the year has not only brought distress to financial markets and investors, but too many have experienced hardships in the form of personal losses like loss of a family member, loss of income, or have been severely ill in the virus.

Maintaining an investor perspective, as this is a blog about personal finance and risk parity investing, a famous quote by Winston Churchill comes to mind that I think should shape our mindsets and outlooks for 2021. After World War II, in connection to the forming of what would become United Nations, Churchill proclaimed, “Never let a good crisis go to waste”.

While our reality has been dire looking the past 12 months, and at times many things have seemed hopeless, there are still many lessons to be learned from the Covid-19 pandemic. Here, I will focus on such lessons from a personal finance and investing perspective.

Hence, before I review my portfolio, let me summarize three key lessons that I have identified from 2020 that are important to take away to the future. This way, we will be much more prepared for the next crises.

I remain a strong believer in that modern financial markets and macro settings are too complex for anyone to have a complete edge and make accurate predictions. Therefore, it is always much more important to admit to oneself that we cannot predict what will happen, but we can prepare.

Continue Reading2020 Year in Review – Never Let A Good Crisis Go To Waste
Read more about the article Portfolio Update – December 2020 – What is Dynamic Risk Allocation?

Portfolio Update – December 2020 – What is Dynamic Risk Allocation?

Contents of this month's post include:

  • How your risk parity portfolio can benefit from Dynamic Risk Allocation
  • Portfolio changes: Scaled down Bitcoin, switched part of Long-Term Government Bonds currency exposure from USD to EUR
  • Monthly Update for December 2020
  • Book tip: Risk Parity Fundamentals by Edward Qian (link at the bottom of the article)
  • In case you missed it: My latest Insight article about How VIX ETFs can improve portfolio performance and stability in volatile environments

It is official, we have survived 2020. Hopefully, 2021 will be a much better year, but only because the calendar now shows "2021" instead of "2020", it does not automatically mean that the situation has changed. We still face many of the same challenge as we did only a week ago.

On that positive note, I am glad to have you back for a new year with this blog about the All Seasons Portfolio and how retail investors can get access to the benefits from risk parity strategies. I have now been writing this blog for 2 years, and it has been an incredible experience. I have learnt a lot along the way, and I hope you have too! But mostly, I enjoy all the discussions with you readers, both in the comment section and bilaterally through different channels. I think discussions are an even better tool for learning and improving, as triangulation of strategies and analyses are important.

I look forward for a new year with this blog, and if you have any ideas of how to make it even better, I am always open for your input! My plan is to continue with the monthly updates, and mix in Insights post about various relevant topics. I will also try to find the time to create a better library over the key components of risk parity investing as different pages to the blog, to provide a better learning experience. I'll try to find the time to do that as soon as possible.

Continue ReadingPortfolio Update – December 2020 – What is Dynamic Risk Allocation?
Read more about the article Insight – How to Improve Portfolio Performance and Risk-Adjusted Return with VIX ETFs

Insight – How to Improve Portfolio Performance and Risk-Adjusted Return with VIX ETFs

This post was originally published on the Patreon page on November 5th, 2020. https://www.patreon.com/posts/43569940  If you like the content I publish on this blog, I appreciate your support to cover hosting costs etc. Even small contributions are greatly appreciated.

Contents:

  • How all common asset classes had weak performance at the same time in March 2020 due to the Coronavirus crisis.
  • That the only asset class actually performing well in that time was VIX ETFs
  • What the VIX is and how you can use it as an insurance policy in your portfolio to protect against volatility, uncertainty and black swans,
  • How including only 3% of a VIX ETF in a risk balanced portfolio increased return, lowered volatility and increased the Sharpe ratio of an example All Seasons Portfolio. This is shown with an extensive case study through first half of 2020 and the 30 month period leading up to 30 June 2020.
  • All raw data on which the analysis, graphs and tables in this article is based on, are exclusively found in the Patreon version of this post. Support the blog to get access.

All assets under-performed in late March.

Do you still remember how different asset classes performed amidst the most urgent phases of the coronavirus crisis? Or have you intentionally suppressed those bad memories and only chosen to remember the recovery in assets such as stocks?

As a reminder, there was period from about March 10th to March 20th when every major asset class declined in valuer, regardless if they were biased to perform well in increasing or decreasing economic growth environments. Stocks and commodities had already fallen by then, but by March 10th, also gold, treasury bonds and inflation-linked bonds fell as well. Nothing managed to offset the declines in growth assets, and any balanced portfolio suffered.

While a risk parity strategy, such as the All Seasons Portfolio strategy, performed much better than the stock market or a 60/40 portfolio, the Covid-19 crisis caused a dent also in the All Seasons Portfolio. The All Seasons Portfolio even turned into negative territory on a YTD basis, even though it recovered rather quickly from that temporary dip.

[3,500 more words]

Continue ReadingInsight – How to Improve Portfolio Performance and Risk-Adjusted Return with VIX ETFs
Read more about the article Which is the Best Commodity Index?

Which is the Best Commodity Index?

  • Monthly portfolio update: Fairly stable month (again): bonds recover, while other assets decrease slightly
  • Book tip: Hot Commodities by Jim Rogers (link at the bottom of the post)
  • In case you missed it: Where does Real Estate fit in the All Seasons Portfolio? (post from 12 September 2020)

Hello, and great to have you back for a new portfolio update.

I know that I am slightly delayed with publishing this post, as I usually spend a few hours over the first weekend of each month to write my thoughts and review the portfolio performance. This weekend, however, I just moved to a new flat, and found it hard to find the necessary time to write the update.

Anyway, in September I made some changes in the portfolio. Not big ones, but mainly moving assets from one exchange to another, from LSE to Xetra, mainly for cost optimisation and to get rid of ETFs denominated in USD.

This move only included my gold and commodities ETFs. The gold exposure remains the same (physically-backed, but only a different issuer: Xetra-Gold), but for my commodities, I have changed the underlying tracked index from Bloomberg Commodity Index (BCOM) to Rogers International Commodity Index (RICI).

As the special topic for this post, let me elaborate a but more on commodities indicies before reviewing my portfolio. It turned out to a slightly longer text than first anticipated, but well worth the read, so buckle up.

Continue ReadingWhich is the Best Commodity Index?
Read more about the article Portfolio Update – August 2020 – How downgraded credit ratings may impact your portfolio

Portfolio Update – August 2020 – How downgraded credit ratings may impact your portfolio

  • Monthly portfolio update: Fairly stable month: bonds down on Fed policy shift, but offset by K-shaped recovery in stocks and commodities
  • Book tip: The Everything Bubble: The Endgame For Central Bank Policy by Graham Summers (link at the bottom of the post)
  • In case you missed it: I have ditched all intermediate-term bonds (post from 3 August 2020)
  • Coming soon: a post on real estate investing and how it fits in the All Seasons Portfolio. Stay tuned, and subscribe to newsletter for notifications!

Buongiorno!

I hope you have had a great summer under the circumstances, and are ready for the next (non-economical) season!

When posting this article, I have just come home to Sweden after a few weeks of visiting my girlfriend's family in Italy. For sure, the virus has put a great strain on the country, but it is good to see that things are moving in the right direction with society opening up. With few exceptions, new cases have been declining in Italy and Europe, which has bolstered investors with renewed confidence the past months.

Our vacation this year was not as we had initially planned (beaches in Sicily), but of a less touristy, and much more responsible, sort. Instead, we have stayed with her family and taken a few day trips to selected non-crowded destination (Venice has not been this empty for centuries). While more and more flights are opening up across Europe, it is still important to be cautious and not take unnecessary risks. One should not think that the danger is over, just because travelling is again somewhat possible. We can just hope for a full recovery as soon as possible.

But this is not a travel blog, but a financial blog, even though I wish to one day be able to sustain a life abroad thanks to my finances.

In this light, I have lately been thinking about how Covid-19 has affected the financial stability of countries, and how that in turn will impact sovereign credit ratings. For example, if debt-to-GDP would increase too much, if the affordability of the debt would fall, or if the economic outlook or stability of a nation would decrease, it will impact the country's ability to service its debt.

The ability to service debt - or a sovereign state's credit worthiness - is what the credit rating agencies Fitch, Moody's and Standard & Poor, are all analysing and rating. If a sovereign state has a good credit rating (AAA, Aaa etc.), this gives great comfort to the investors who purchase the country's bonds that there is a low risk of that the state defaults on its debt.

Continue ReadingPortfolio Update – August 2020 – How downgraded credit ratings may impact your portfolio