Bonds

Read more about the article Why The 60/40 Portfolio Is Not Balanced

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.

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Read more about the article There Impact of Interest Rate Risk When Investing

There Impact of Interest Rate Risk When Investing

2022 was a shaky year for capital market.

Interest rate risk is an important type of risk to be aware of as an investor, as it affects stocks and bonds indiscriminately. That is especially harmful for investors only investing in stocks or using a "balanced" stock-bond portfolio.

We will therefore be taking a closer look at what it is and whether there is anything we can do as investors to protect our wealth and portfolios against it.

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Read more about the article Insights – Interest Rate Risk and Asset Correlations with Future Cash Rate Expectations

Insights – Interest Rate Risk and Asset Correlations with Future Cash Rate Expectations

"Is the All Seasons Portfolio strategy not working anymore?"

With an annual drawdown for such portfolios almost as bad as for the stock market YTD (S&P 500 currently being down 16% since 1 January, having briefly been below -20%), I am not surprised that I have been hearing this question more and more recently. Is this a bug or a feature?

The first seven months of 2022 can be illustrated by two major themes in terms of financial markets: a) significant underperformance of major asset classes such as stocks and bonds, and b) rising rates.

The latter constitutes one of two undiversifiable risks for investors, as when the cah rate rises, that impacts asset prices as returns of risky assets always compete with the return of cash.

In this article, we explore interest rate risk and how most major asset classes have correlated with the future cash rate expectations over the first seven months of 2022. We try to answer the question on if the All Seasons Portfolio strategy is broken, or if the playing field has been reset and that we can expect better performance ahead.

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Read more about the article eToro Post – Systematic Trading and Strategic Rebalancing of Commodities

eToro Post – Systematic Trading and Strategic Rebalancing of Commodities

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  • Reading time:5 mins read

This pot was originally shared on my eToro feed on 13 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.

The benefit of a systematic strategy - like the one I run here on eToro - rather than a discretionary strategy is that you don't get in your own way when following rules that are proven to work.

Hence, by taking a trader/person with cognitive biases out of the equation, you increase the probability of success by avoiding mistakes caused by limits of the human brain.

It is intuitively hard to buy assets that are trending, as it feels more expensive by the day when the price goes up, and you tell yourself you will "buy the dip".

The problem is that when that dip occurs, the trend may be broken and the asset is no longer an attractive buy. That is when our cognitive biases hinder us from success.

When we go against rules, we tend to make mistakes, as the rules were set in place for a reason.

Due to these rules, I will be strategically rebalancing Commodities and Long-Term Treasury Bonds in my eToro portfolio as they have exceeded their rebalancing spans. Read more about my reasoning here.

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Read more about the article How Roll Yield Influences Bond ETF Performance In Rising Yield Environments

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.

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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