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.

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Portfolio Update – January 2021 – What the Gamestop frenzy can teach the sensible investor

It is with a great portion of excitement that I have now sat down to finish up the first monthly portfolio update of 2021!

Good to have you here with me to review the month. In this new year, most of these monthly updates will remain familiar, but I have included some new features. Mainly, I have added a few more graphs in the portfolio review segment, which in more details shows the daily performance of my portfolio (also with comparison against the S&P 500) on a rolling 3-month period. I hope this will be a helpful tool for you when contemplating replicating a risk parity strategy.

The greatest news that has made the most headlines in January (besides the Capitoleum protests) has obviously been the short/gamma squeeze in GME and other heavily short stocks, as constructed by a group of Redditors in the subreddit r/WallStreetBets.

I am confident that you have not missed this, and perhaps you are already tired of that mania, which has already reached beyond its apex. I will not go into detail reviewing the occurrence itself, as that has already been covered by literally everyone - finance media and independent bloggers alike.

But even though the mania is not really related to the All Seasons Portfolio strategy - or even sensible investing at all for that matter - there are still elements that can be useful for the investor who is better at managing risk. I will therefore not ignore the short squeeze all together but I will focus on a few points that I have identified as important reminders for both sensible investors and FOMO traders.

Continue Reading Portfolio Update – January 2021 – What the Gamestop frenzy can teach the sensible investor

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

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

Portfolio Update – November 2020 – Prepare for Year End Rebalancing

  • Prepare for annual rebalancing: J.P. Morgan estimates USD 300bn equity sell-off for balanced funds
  • Portfolio changes: Introduction of VIX and Bitcoin
  • Temporarily decreased inflation-linked bonds in deflation fright
  • Monthly Update for November
  • Book tip: Beyond Blockchain: The Death of the Dollar and the Rise of Digital Currency by Erik Townsend (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

Hi, and great to have you back for a new portfolio update filled to the brink with content.

Hope you are in good health and are preparing for a safe holiday seasons coming up. It is going to be a rather different Christmas this year as many countries are imposing extended restrictions by end of December. Celebrations with family will perhaps not be possible for many unfortunately, and that is a tough thing. One can only hope that our sacrifice to stay at home with only immediate family will help us avoid a third wave and as many unnecessary deaths as possible before vaccines can be rolled out on a larger scale next year.

I had hopes on joining my girlfriend on her trip to her family in Italy, but with the new restrictions, it seems more likely I will be stuck in Sweden for Christmas and New Years. It is unfortunate, but what can you do? This year has been challenging in many ways.

Winter is coming here in Sweden, and the darkness with it. I read that someone likened how it is to live here in the winter months to living in a refrigerator with a broken lamp. It is actually a quite accurate description, as the sun sets already around 3pm.

We have a lot of ground to cover in this month's update, so let's just dive into it. I have made some structural changes to my portfolio and will therefore spend some time to lay down my reasoning for the changes. This includes an addition of VIX and Bitcoin, but also a temporary decrease in inflation-linked bonds. Before going into my reasoning on these changes, we will have a look at the coming rebalancing period in late December.

Continue Reading Portfolio Update – November 2020 – Prepare for Year End Rebalancing

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