Thursday, March 02, 2023

Are You Sure You Want An All Weather Portfolio?

We are going through some stuff up here, mostly with weather but a few other things too. I've had tabs open for this blog post all week and finally getting to it today.

Over the summer we looked at the Cockroach Portfolio which is an all-weather sort of strategy that is not intended to look like the stock market. Here's one link and the second post

This graphic captures the strategy.

 

And the following ETFs are how someone could come sort of close to copying it.

  

Here are the results as far back as we can go. Portfolio 2 is the S&P 500 and Portfolio 3 is the Vanguard Balanced Index Fund (VBAIX) which is a proxy for a 60/40 portfolio. I would also add that Portfoliovisualizer says Cockroach's correlation to the S&P 500 is -0.01 

The Cockroach should not be expected to keep up with equities but it sort of has and done so with a very similar standard deviation but no correlation. What gives?

The Cockroach is in blue, S&P 500 is red and VBAIX is yellow.

 

It got a lot of it's return in 2017 likely from Bitcoin. It had a big edge in 2020, which was probably also from Bitcoin. It held up better in 2022 which makes sense because it owns a bunch of stuff that is not equities or bonds. It lagged badly in 2016, 2019 and 2021. 

The other day I asked whether you could hang in with a portfolio that lagged badly the first year you implemented it. Similar question about Cockroach, could you stick with a portfolio that frequently does not look like anything else? That is a tough one to answer. Compounding the difficulty is that it appears the longer term result would be much less were it not for Bitcoin which is a great example of how asymmetry can work for you but there is nothing that says Bitcoin must have another huge rally again. 

A lot of sophisticated investors talk about reducing correlation and while it is important there is a difference between a lower correlation to reduce volatility and building something that has a low probability of capturing the equity market's ergodicity. It is important to know the difference and choose a suitable path. 

VIXM is a client holding. I have no interest or intention of using any of the other funds mentioned personally or for clients.

We have had an insane winter with more snow than I can ever recall having here. Our Tundra has had snow chains on it since January 16th. I think I talked about this some already. After weeks of getting 8-10 inches every few days without much melting, we had about a foot and half fall yesterday. There's so much snow, there's no room for me to push it with my plow. The road is only wide enough for an ATV or UTV and may be that way for a while. 

In the middle of plowing yesterday with the intention of early and often, and I sheared the shackle that pretty much keeps the plow on the ATV. The nature of ATV plowing is that stuff breaks all the time. A fire department buddy came, took the shackle and the plate it goes onto and welded it together and brought it back this morning. I'm back in business. There's been other stuff going on too including today we had to say goodbye to Trixie, named after the character from Deadwood, she was 15 and half. She was chugging along pretty well and then just deteriorated dramatically over the last 36 hours. 

Here are some pictures. 

May be an image of 1 person and snow 

May be an image of tree, nature and snow 

May be an image of tree, snow and nature 

May be an image of dog

 

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