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.

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

Portfolio Update – October 2020 – U.S. Elections and Risk Off

  • Monthly portfolio update: Election jitters and a risk off sentiment in markets toward late October brought down most asset classes. Most losses have been recovered since.
  • Diversified risk parity strategies such as the All Seasons Portfolio will bring stability to uncertain times ahead
  • Book tip: The Permanent Portfolio: Harry Browne's Long-Term Investment Strategy (link at the bottom of the post)
  • In case you missed it: My latest article about How VIX ETFs can improve portfolio performance and stability in volatile environments (Now available exclusively on Patreon; to be posted on this blog in late November 2020)

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

I hope that in these challenging times, you are staying positive and testing negative.

I can barely believe we are already in November - the darkest and gloomiest month of the year (here in Sweden it will now be cloudy, windy and murky for the next 2-3 weeks at least). And on top of it, the Covid-19 virus soon celebrates its 1 year birthday, and we are on the ninth month of working from home here, with renewed lockdowns all across Europe. It seems hard to find things to cherish about, but we'll need to try our hardest to not let that affect us too much. I have just received a delivery from Amazon for two books on risk parity, which I will be burying myself in while autumn storms blow outside.

This past week I have spend a lot of my time in analysing how investing in VIX (CBOE's Volatility Index) through a VIX ETF would have impacted a risk parity portfolio in the spring of 2020 and the Covid-19 crisis. As you may recall, all asset classes (including government bonds and gold) declined for 10 days in March, so I looked into if there were any asset class available that could have offset the losses in a distressed market.

Continue ReadingPortfolio Update – October 2020 – U.S. Elections and Risk Off

Portfolio Update – September 2020 – 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 ReadingPortfolio Update – September 2020 – Which is the Best Commodity Index?

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

Portfolio Update – July 2020 – The value of currency hedging

  • Worst month for the US Dollar in more than a decade: how it impacts European investors and how to protect against currency risk
  • Monthly portfolio update: Fairly stable month: impacted by negative currency movements
  • Book tip: Principles for Navigating Big Debt Crises by Ray Dalio (link at the bottom of the post)
  • In case you missed it: I have ditched all intermediate-term bonds

Hope you are having a good summer so far, even though I am guessing it is spent quite close to home this year. Unlike others here in the Nordics, I have worked through July, and will have my vacation from mid-August instead. Looking forward to get some time off to read about investing.

I am really pleased to see that there seems to be great interest out there for low-volatility investing and balanced asset portfolio allocations. I strongly believe that the past decade has made stock investing feel easy, but there are more risk in it that you might have thought. Over the long term, the economy, and thus the financial markets, experiences big shifts in the long-term cycle. Now, total debt levels to GDP are at extreme levels not seen since the Great Depression.

This ratio is enhanced by decreasing GDP world-wide due to lockdowns and increased debt to cope with the effects of the coronavirus. Are we nearing the end of the long term debt cycle and are nearing a great deleveraging that must ensue thereafter? According to Ray Dalio, we were nearing the end of the long-term debt cycle even a year before the Covid-19 outbreak hit the markets, as he describes in a video posted by Yahoo Finance from early 2019.

That is quite scary when you think of it, and if I was heavily invested in stocks, I would be terrified. Luckily, several assets in the All Seasons Portfolio and a balanced portfolio will protect against such downturn. You will find a link to Ray Dalio's book Principles for Navigating Big Debt Crises (2018) at the end of this post. If you have not read this already - it is now more relevant than ever.

Even though it is interesting, that is not the main topic for the day. Instead, we will be discussing EUR Hedged investing.

Continue ReadingPortfolio Update – July 2020 – The value of currency hedging

Portfolio Update – June 2020 – We’re In The Clear: Shift To Stocks! But Not Really…

  • Summary of June 2020 in the economy - Stock market is still uncertain
  • Monthly portfolio update: Fairly stable month: long-term bonds down, stocks, gold and commodities up
  • Book tip: Balanced Asset Allocation: How to Profit in Any Economic Climate by Alex Shahidi (link at the bottom of the post)
  • In case you missed it: Deep Dive post about how to hedge against inflation on my Patreon page was published earlier in June

I am so glad that you have found your way to my June portfolio update of the All Seasons Portfolio blog. It is a rainy afternoon here in Stockholm that I am writing this in early July. Still keeping social distancing and working from home quite a lot. Hoping to see a change soon, for the benefit of all fellow Europeans. We really need to get the economy going again, as I am sure you agree. Hope you have been able to keep your job though.

This month, I have come to the conclusion that the time for stocks is now, at least if you look at what is going on in the markets. Not sure if I am convinced this is the way we are heading, so I prefer to diversify my portfolio properly.

The stock market have bounced back from the steepest downturn in memory, and what looks like the shortest recession in history if you only look at the stock market development. The stock market is almost back at similar levels to where they were before all hell broke loose in February, regardless but S&P 500 saw almost flat development over June with +1.8%. Mostly, the climb in stocks were driven by tech and "stay at home" companies, as Nasdaq composite rose 6% over the month.

On top of that, central banks and governments over the world are launching new stimulus packages by the week, as we covered in last month's update. The two acronyms TINA and FOMO are the main forces driving the markets upwards. As a reminder, these stand for "There Is No Alternative" and "Fear Of Missing Out", meaning that investors see that there is no alternative to stocks to achieve return, and investors are afraid to be left at the station if they do not jump on the train as soon as possible. Both of these are driving great amount of money into the stock market, increasing demand.

Continue ReadingPortfolio Update – June 2020 – We’re In The Clear: Shift To Stocks! But Not Really…