Portfolio Update – December 2021 – 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.

Continue ReadingPortfolio Update – December 2021 – How Roll Yield Influences Bond ETF Performance In Rising Yield Environments

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.

Continue ReadingWhy Volatility Trend Tracking Matters And How To Optimize Your Portfolio Based On Inverse Volatility

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 Reading2020 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 ReadingPortfolio 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 ReadingPortfolio Update – November 2020 – Prepare for Year End Rebalancing

Insight – Where does Real Estate investing fit in the All Seasons Portfolio?

In this rather lengthy post, the following topics will be discussed:

  • In what economical environments are real estate biased to perform well (economic growth and inflation)?
  • Five ways of investing in real estate, regardless how much money you have
  • How to adjust your balanced portfolio when including real estate - a template for adjusting portfolios regardless of new asset class
  • A list of resources with some of the best books on real estate investing

There are numerous opportunities and strategies for making money by investing. The ultimate goal is always to achieve a combination of positive cash flow and value appreciation of your owned asset. It is just a matter of preferred strategy for the investor which dictates how you can grow your wealth.

With the All Seasons Portfolio strategy, you can achieve profits but with less volatility than on the stock market. This is achieved by having a balanced portfolio that is diversified between asset classes. Typically, those asset classes are stocks, long-term government bonds, inflation-linked bonds, gold and commodities, with the following allocation between them.

There are of course many more asset classes available than the five listed above. One extremely important such asset class is real estate, which is a popular investment object among investors. It is so attractive, because it offers profits in two ways: value appreciation of the property, as well as monthly cash flow from rental income.

In this deep dive article, we will be looking more closely at real estate investing - how you can get exposure to it and with how much capital - and how it fits into an All Seasons Portfolio. Let us first begin with the latter of these two topics by answering the question of what economic biases real estate have.

Continue ReadingInsight – Where does Real Estate investing fit in the All Seasons Portfolio?