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 Reading Portfolio Update – October and November 2021 – Strategic Rebalancing

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

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 Reading Portfolio 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 Reading Portfolio Update – July 2020 – The value of currency hedging

Correction of my Portfolio – Ditching Intermediate-Term Bonds

It is time for a kind of blog post that I hope will be as few in number as possible, but which I fear are inevitable from time to time. I have corrected a mistake, and want to tell you about it.

In my All Seasons Portfolio, I have until 20 July 2020 (the time of writing this post) held a certain amount if intermediate-term treasury bonds, i.e. bond with a duration of less than 10 years. I have held this in addition to my long-term bonds (20+ years) as part of the bonds portion of the portfolio. The splits have been 10% intermediate-term bonds and 30% long-term bonds, out of the whole portfolio.

As I have come across new and better information, I have chosen to reconsider the decision to hold intermediate-term bonds. They are not a bad investment as such – on the contrary, they are good when considering the risk-adjusted return – but they do not suit the All Seasons Portfolio Strategy. 

Continue Reading Correction of my Portfolio – Ditching Intermediate-Term Bonds

Portfolio Update – February 2020 – Coping financially after the corona virus

  • Corona update: All Seasons Portfolio development was -3.46% 21 Feb to 6 Mar, compared to -14.33 All-World Stocks
  • Bonds helping to avoid the worst drawdown
  • Stocks, gold and commodities in negative territories, while gold has gained back some losses during the beginning of March
  • All Seasons Portfolio Strategy shows its value during shaky markets; it is good to diversify across asset classes to decrease portfolio risk
  • After these few weeks, my confidence in the strategy remains strong

Hi and welcome back,

Let's cut to the chase straight away - it is during special circumstance that I write this month's portfolio update. February har been a rocky month all over the world and asset types. I am sure you have felt the effects of the spread of the corona virus Covid19 in your portfolio. I guess that you are also very curious about how the All Seasons Portfolio has performed during a time when the VIX index, which measures market volatility, has reached 54 (so far)?

Have you been at all curious how the All Seasons Portfolio strategy has worked out in the middle of the corona outbreak and the worries on the financial markets? Luckily, that is what I have set out to answer this month.

Considering that the All Seasons Portfolio is designed with the thought in mind that it should withstand the volatility on the stock market, my portfolio should have fared quite well? That is what I will answer in this month's portfolio update.

The layout of today's post will be that first, we will look at the past two weeks specifically how the All Seasons Portfolio has managed the risks of the corona outbreak and the volatility on the markets. We'll go through each asset classes and look into the day-by-day development of my All Seasons Portfolio. Lastly, we will look at the month-by-month portfolio updates as we always do.

Read more to find out how my portfolio has been impacted by the bear market caused by the corona virus.

Continue Reading Portfolio Update – February 2020 – Coping financially after the corona virus