Low Economic Growth

Read more about the article Portfolio Update – October and November 2021 – Strategic Rebalancing

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 ReadingPortfolio Update – October and November 2021 – Strategic Rebalancing
Read more about the article The Two Most Important Risks For Retail Investors And How To Avoid Them

The Two Most Important Risks For Retail Investors And How To Avoid Them

With the recent strong positive trend in stocks and risk assets since April 2020, I have been thinking quite a bit about a couple risks that face retail investors and which have become more and more relevant now that I get a bit of vertigo from the S&P 500.

These risks are 1) the risk of us not reaching our financial goals by not managing our investment risk properly and 2) abandoning a safer strategy when we see others making more money with high-risk strategies.

I will discuss these risks more in details below and why they matter, and in particular why it is more urgent for retail investors to have understood these risks.

Namely, apart from institutions with more or less infinite investment horizons, we as retail investors are only active on the financial markets for a quite brief moment when you zoom out and consider all the history of investing.

And as we only get one shot at it (no do-overs), it is important that we get it right from the start. It is crucial to avoid making a mess of our investing careers that we cannot repair later.

I hope you find this text useful, and please share your thoughts in the comments or directly by email to nicholas@allseasonsportfolio.eu.

And as usual, the regular update of my All Seasons Portfolio(s) follows right after the month's special topic. July was a quite good month for me, and I have made a slight alteration of my portfolio, switching the TIPS ETF from a global one to one with longer-term US inflation-linked bonds.

But more of that to come. Now, let's have a look at a different way of defining "risk".

Continue ReadingThe Two Most Important Risks For Retail Investors And How To Avoid Them
Read more about the article Portfolio Update – May 2021 – Indicators of an Overvalued Stock Market and What You Can Do About It

Portfolio Update – May 2021 – Indicators of an Overvalued Stock Market and What You Can Do About It

  • Has the stock market reached a permanently high plateau, or can we expect lower return the coming decade?
  • Monthly Update for May 2021 with a fresh set of charts

I hope you are sitting comfortably and have fetched a nice cup of coffee or something more refreshing, because before we get into the monthly development for May 2021 of my portfolio, we have an elaborate analysis of the value of the stock market in front of us.

There has been a couple of things that have been bugging med lately. That is the current high valuation of the stock market regardless of metric used, and the fact that many non-professional investors' inability to understand that an average annual return of 7-8% on the stock market is just an average rather than something you can expect every year to come.

I think that many have been trapped in a recency bias that will catch up with them eventually, unless retail investors choose to diversify from an all-stock portfolio to something more similar to an All Seasons Portfolio.

I will explain why I think so in detail in this article, so let's just dive into it.

I recently bought the book Adaptive Asset Allocation by the team at ReSolve Asset Management. While the main focus of the book was risk parity and a different view thereto than what the more static All Seasons Portfolio strategy offers, there was one part in the background section that really resonated with me, and which I perceive that many investors, and especially non-professional savers, miss.

Continue ReadingPortfolio Update – May 2021 – Indicators of an Overvalued Stock Market and What You Can Do About It
Read more about the article Portfolio Update – April 2021 – What a Game of Chess Can Teach You About Your Instincts as an Investor

Portfolio Update – April 2021 – What a Game of Chess Can Teach You About Your Instincts as an Investor

Are you sure if your instincts align with your intended way of investing?

I am asking this because if there is a mismatch between what kind of person you are when it comes to your decision making and acting on new information on the one hand and your investment goals on the other hand, you will not reach your financial goals if you do not know yourself.

How your mind works and how you behave matters more than you think when it comes to investing, as it will impact firstly the investment strategy you chose, and secondly, how you implement and deviate from the strategy in new situations and changed market conditions.

But regardless how good an investor you are or what instincts come naturally to you, if you know who you are as a person and how your mind works, you could prepare your strategy already in advance to be better equipped to face the challenges that financial markets can throw at you. Even an investor with less experience and bad instincts can succeed in tough times by setting up clear and good rules for how to behave and then rigorously stick to those rules, cutting out all emotion.

Rule-based investing with a well-diversified portfolio is an extremely easy way to continuously hit good results without great losses. And if you diversify also between asset classes, choppy markets can even be your friend when you rebalance the portfolio from well-performing assets to assets that are at their relative lows.

But how do you know what mind you posses and what instincts you have?

Continue ReadingPortfolio Update – April 2021 – What a Game of Chess Can Teach You About Your Instincts as an Investor
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 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