Portfolio Update – May 2022

Market update of May 2022 includes a growing dependency on the next few inflation prints, as these will determine the strength of Fed's reactions and in extent the direction of the stock and bonds markets.

With negative QoQ real GDP growth in the US and continuing high inflation, we are not far from a technical recession and truly entering a stagflationary environment. While not there completely yet, the risk will put pressure on growth assets and nominal bonds, why broader exposure to other assets is recommended.

In my All Seasons Portfolio, the above factors impacted monthly returns negatively, but I expect my strategy to be prepared for the uncertainty ahead with continuing overweighting to inflation assets.

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Portfolio Update – April 2022

Market update of April 2022 includes a continuing emphasis on interest rate risk on the back of rising inflation, albeit recession fears raise questions of the timing of rate hikes and the impact on the economy. We'll analyze what the indicators tell.

As a result of the current inflationary environment, strongest portfolio performers include commodities, gold and VIX in April, but much of the profits were offset by losses in bonds. Portfolio overall remained stable.

In my strategy, a couple of tweaks have been implemented last month: i) tactical tilt toward inflation-linked bonds from nominal bonds, and ii) introduction of leverage through margin. Read more about these changes in this month's post.

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Portfolio Update – February 2022

This month, I will be trying a slightly changed format for this monthly update post.

Previously, I have combined a deep dive/insights text with an update of my portfolio performance, but I have been considering changing things up a bit.

Instead, I will today be first focusing only on a market update for the past month, together with looking a trends in economic growth and inflation (remember, the four regimes that the All Seasons Portfolio strategy is designed to fend off), before presenting my portfolio update on the back of it.

In February 2022, as well see from the indicators, we remain in an inflationary boom - for now - but it seems like stagflation could be on the horizon as the growth rate is falling.

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Portfolio Update – January 2022 – Interest Rate Risk

January 2022 was a shaky month for capital markets, and this turmoil has continued into February as well.

Russia’s invasion of Ukraine’s and a severe violation of a free nation’s sovereignty has certainly caused much volatility on the markets. But the fact is that while conflict is leading to a changed world with a new world order, it is actually not the sole culprit for the turbulence we have seen at late.

Sure, the was has a great impact on commodity prices (more on that later), as, firstly, the sanctions limiting trading with Russian oil, takes a vast amount of barrels of oil off the market on a daily basis, which certainly will drive up prices.

But the fact is that the main driver of asset prices is not the war in Ukraine, but still the same story as has been told since December 2021, namely inflation and expected interest rate hikes.

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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eToro Post – Prediction vs. Preparation

Is a good investment outcome always a sign of a great investment decision?

Intuitively, one could believe so, but more often than you might believe, that is actually not the case.

The past decade has favored stocks massively, meaning that investors who ignored diversified investment strategies and who applied poor risk management, have actually benefitted, while prudent investors have seen their neighbors get richer on meme stocks, cryptos and ARKK ETFs.

But are all these stock investors geniuses for achieving such a great outcome? Hardly. Such a belief among these investors – that they are superior investors – is just a form of outcome bias or “resulting” as described by Annie Dike in her book “Thinking In Bets”.

In short, this means that not all decisions with good results are necessarily good decisions.

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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.

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