Navigating the Pandemic Week: Portfolio on 2.28.20

The sea was angry this week my friends. Prices rose, crested and crashed violently for five straight days. Sadly, the waves spent the majority of the time cresting and crashing. The market threw portfolios around at its will, with no regard for historical expectations or precedents. I suspect few were spared from its wrath.

Navigating the Typhoon

My compass constantly chased a moving north pole. The target portfolio (updating at the top of the blog) shifted back and forth with the motion of the waves, often moving 8% in a matter of minutes. The clear definitive beauty of backtest was gone, replaced with an uncertainty and haziness of the live typhoon. The inevitable delay of data coupled to extreme price movement, made finding the proper heading for the ship in the middle of the squall a guess at best.

I was always chasing the proper allocations, always a step behind. I rebalanced Monday to makeup for missing Friday and prepare for the onset of the storm, (the market moved enough that I would have wanted to rebalance even if I had rebalanced on Friday). The weather had changed, and different sails were needed.

The ship seemed reasonably stable in that environment, not perfect, but close. Then the bottom fell out of the market on Thursday afternoon. The portfolio was suddenly 18% over invested in stocks. The waves also began crashing from a different direction, as gold had flipped from propping up the ship to aiding in the effort to overturn the vessel. The ship’s bearing needed to change, so I rebalanced again Friday morning.

All week, twitter was full of recommendations to hoist up the sails for clear calm weather (aggressively buying the dip). I hope they haven’t been blown too far off course.

In total, my portfolio fell 4% for the week (4.5% if you don’t include the lucky break to not rebalance last Friday), which is awful when viewed in isolation. However the storm was violent. The S&P 500 fell 11.5%. Even the old reliable 60/40 portfolio fell nearly 6% this week.  A highly diversified global asset allocation performed similarly. So relatively, down 4% doesn’t feel so terrible.

Slightly Disappointed

Still, I was hoping for a better performance out of the strategy. The call last Friday to increase the stock allocation didn’t turn out to be wise (although I didn’t pay for it in real life). The signal to buy more gold Friday morning, which didn’t exist Thursday afternoon, wasn’t great either (I paid for that one).¹ The strategy is far from perfect. It makes mistakes all the time. You trust it’s mostly right and never disastrously wrong. So far that seems to be the case.

Because of the high volatility I lagged the correct portfolio all week. As an example, I really wish I could have traded down Thursday afternoon when the bottom fell out. The moves Thursday night and Friday morning would have hurt far less if I had. In some ways, the lucky missed trades on Friday were counteracted by the poor timing of missing a needed rebalance on Thursday.

Gold worked wonderfully on Monday. Then it flipped and dragged on the portfolio all week. Gold can be strange like that. In my opinion gold is rarely actually “uncorrelated” with the market. It’s usually either highly correlated or highly negatively correlated. This equates to “uncorrelated” in the big picture, but not necessarily in the short term. This week was a perfect example. If gold had only continued to behave. Oh well. You win some, you lose some with gold.

But I Shouldn’t Be Disappointed

Honestly though, the strategy performed as expected.  I started this blog saying my strategy would produce 1/3rd the drawdowns of the S&P 500, and here we are, at 1/3rd the drawdown.  

Before this week, the portfolio tracked right with the market as it climbed.  After the pullback it’s still up 1.3% for the year.  Hopefully that holds next week.

What If You Don’t Rebalance Mid week?

Now some may say they can’t possibly rebalance the portfolio twice mid week. I totally understand that. The prior backtests provided don’t assume any midweek rebalancing. If you had just stuck with last Friday’s portfolio and held there, you would have lost 5.5%. So chasing the proper portfolio during the week saved 1.5%. But I believe down 5.5% is still a reasonable outcome for the week.

If I could have traded every day, my own portfolio would have lost even less. You just have to try and do the best you can.

Are The Skies Clear?

Volatility right now is obviously pretty high in all assets. Correlations, which were negative, are rising in all assets. This is why Cash showed up in the projected portfolio Thursday, and increased Friday.  

Because I rebalanced earlier in the day, I left my portfolio alone for the remainder of Friday. It’s currently near the portfolio below, but with more gold and less cash. If I had rebalanced late on February 28th, 2020 the strategy would have rebalanced to:

31% SPY , 28% TLT , 11% GLD , 30% Cash

Has the storm passed or are we just in the eye (are we even to the eye yet)? Will next week bring a big rally or further pain?

I don’t know. However, the portfolio above is my best estimate of the proper portfolio “bearing” in today enviroment, with the goal to optimize the geometric return. So far it has kept the ship upright and mostly moving forward. The winds and waves are fierce, but we’re still on course.

May next week brings fair winds and following seas to all our ships.

1-Its always risky to rebalance using a morning reading. The portfolio was so out of balance though it needed to be done.