Insights – Interest Rate Risk and Asset Correlations with Future Cash Rate Expectations

"Is the All Seasons Portfolio strategy not working anymore?"

With an annual drawdown for such portfolios almost as bad as for the stock market YTD (S&P 500 currently being down 16% since 1 January, having briefly been below -20%), I am not surprised that I have been hearing this question more and more recently. Is this a bug or a feature?

The first seven months of 2022 can be illustrated by two major themes in terms of financial markets: a) significant underperformance of major asset classes such as stocks and bonds, and b) rising rates.

The latter constitutes one of two undiversifiable risks for investors, as when the cah rate rises, that impacts asset prices as returns of risky assets always compete with the return of cash.

In this article, we explore interest rate risk and how most major asset classes have correlated with the future cash rate expectations over the first seven months of 2022. We try to answer the question on if the All Seasons Portfolio strategy is broken, or if the playing field has been reset and that we can expect better performance ahead.

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eToro Post – How Strategic Rebalancing Helped Avoid a -35% Loss in Long Treasury Bonds

Since I joined eToro in April last year, I have been sharing insights and observations about investing with risk balanced strategies such as the All Seasons Portfolio (“ASP”) strategy I run here. As eToro is a social trading platform, I from time to time share content in my eToro feed, which I then share on the blog in posts like this.

As part of my All Seasons Portfolio, the asset classes have a set aimed allocation, which is based on their historical volatility and correlations and biases to different economic regimes. For rebalancing the portfolio, I apply rebalancing spans that allow assets to deviate from the aimed allocation with +/- 20%, unless it is in a trend.

Such rebalancing trigger occurred in March 2022 for Long-Term Treasury Bonds, as its weight had fallen by more than 20%, but as it was in a clear negative trend, rebalancing was postponed until May 2022.

By waiting with the rebalancing, I managed to avoid a loss of more than 35% on the position I would have taken in March (or -2.5% on a portfolio level).

In this post, we describe in a bit more detail the benefits of applying such strategic rebalancing rules.

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eToro Post – Different Types of Inflation and Assets That Hedge Against Each

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Surely you have not missed the talks about inflation the past year. Even from the Fed and Yellen, the sentiment about inflation has changed from “not a problem” to “transitory” to “longer than first expected” and now to “good for the economy”.

While the price of risk assets, such as stocks, may also inflate due to the rise in inflation, they are not rising as much in real terms.

Rising inflation, and especially inflation that is higher than expected, is harmful to most common portfolios that comprise of stocks, or a combination of the two like the 60/40 Portfolio. Both stock and bonds are assets that perform well in times of low or decreasing inflation, and will lag in times when inflation rises.

It is thus vital to have a portfolio which also includes inflation hedges to mitigate the risk of unexpected inflation prints.

In this post, we will be looking at different types of inflation - as inflation can manifest in different ways - and how you can protect your wealth against each of them with different assets.

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Insight – What Assets Should You Invest In To Protect Your Portfolio Against Inflation?

The Covid-19 coronavirus has rocked the boat during the first half of 2020 and made a huge dent on financial markets and on the growth of the economy. We are still only in the beginning phases of the turmoil, and it is only in the future that we will truly get a picture of all consequences and how the virus will affect the world economy and global trade. 

In this article, we will be taking a closer look at what actions central banks and governments have taken to stimulate the economy; how such stimulus may affect inflation; what asset you can invest in to be protected against inflation; and how such assets fit in the All Seasons Portfolio Strategy.

Even though many things are uncertain, a couple of things we do already know for sure though, and that is that many are likely to lose their jobs and that many companies are likely to have no choice than to file for bankruptcy. This would have devastating consequences for the economy in many countries, but even more so for the people affected by the growing unemployment rates.In a response to the potential crisis and alleviate the harmful impacts, governments and central banks have acted quickly and they have acted strongly. 

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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.

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