After a nice reprieve the prior week, the losses returned with a vengeance this week, down 5.4%. Turns out the back side of the storm brings more damage than the front. The week of March 9th, 2020 will go down in the history books with the likes of 1929, 1987 and 2008.
In some ways this was the strategy at it’s worst. Correlations collapsed mid week and there wasn’t anywhere to hide.
This lead to the worst week I’ve realized trading the strategy live. Compared to the unlevered backtest, the past five days rank as the second worst week ever.
A Historically Bad Week
Wednesday was a strange day. The S&P 500 and the 30 year treasury bond both fell over 3%+ while gold also lost value. This has never happened before. Not a good setup when only holding 3 risky assets.
I also suspect this week was “the permanent portfolio’s” worst ever. The combined average return for stocks, 30 year treasuries, and gold was the lowest since 1977.
January 21st 1980 was the prior low, when gold fell nearly 22%. Next was October 6th, 2008, when the S&P 500 fell 18%. In those weeks a single asset collapsed.
This week the entire team worked together.
- SPY down 9.5%
- TLT down 7.9%
- GLD down 9.1%
The Importance of Cash
This is when cash becomes very important. I said last week that:
“This is definitely a defensive portfolio. It doesn’t mean the markets are likely to keep falling. But at this level of volatility the potential pain, and impact to geometric return, is too great to ignore. “
Volatility was very high. Deep losses were definitely on the table. Deep losses are bad for geometric returns. Just as discussed in “Investing Games“, Geometric Balancing uses cash to protect against owning a portfolio with negative geometric returns. Therefore it elevated cash to the largest allocation last week. Cash is really the only asset you can turn to when correlations all go to 1 (outside of outright shorting or tail hedges).
Live to Fight Another Day
For the year, the strategy is down just over one percent. It was a poor week, but the concepts are working, keeping the portfolio away from the deepest losses.
Returns are net of trading costs. They do not include an advosry fee, as this is my family’s account and I am not an advisor. Past Performance is not indicative of future performance. Dividends are re-invested.
Even though the stock market had a great close on Friday, projected portfolio volatility continued to rise all week. So cash increases further. On March 13th, 2020, the strategy rebalanced to:
13% SPY , 22% TLT , 11% GLD , 55% Cash
great work