Before wrapping up and going silent for a few days I thought I’d share with you the first calendar month results for our new core allocation.
Now, before I proceed, while it is my intent to offer up more detailed — specific to our mix — info as the future unfolds, I want to make clear that a one-month snapshot is absolutely no indication of what the future may hold. While we rigorously test historical results for each asset class, how a given position responds to future events could vary from expectations.
That said, the core mix moved in response to January’s fluctuations virtually as expected. And the stock market in January was indeed accommodative as a very short-term test case. I.e., it started the month going straight up, finished going straight down.
Keep in mind, our present objective is to capture some upside should the bull market continue while protecting against huge downside should the market finally rollover.
The blue line represents a real client portfolio that we were able to move 100% to our updated asset mix. The green line represents the benchmark (MSCI World) stock index. This client’s target is 80% core, 20% fixed income.
First two weeks of January: click to enlarge…
Note the widening gap between the overall stock market and the portfolio as the market moved higher (fyi, the dip in the portfolio just before halfway through was our Q1 advisory fee). I.e., for the first two weeks of the year an all equity portfolio outperformed our core, which combines equities (with a defensive sector tilt), currencies and alternative investments.
Second two weeks of January:
Note how, as the market turned down, the portfolio notably outperformed (which is our primary objective at present).
The full month (the red arrows measure the gap in performance at the market peak, then at the end of the month):
I should point out that, given the uncorrelated nature of the currency and alternative positions, there will likely be periods where our core mix outperforms stocks even as the stock market rallies. You can argue the same on the downside, although with lower odds and only during modest downturns. On measurable moves lower we expect to see consistent, and dramatic (the lower the stock market goes), outperformance on the part of the portfolio.
Here’s a risk/return analysis of the featured portfolio vs the S&P 500 Index:
Per the notations on the snip, the S&P 500 is represented on the X axis, with the portfolio on the Y. Note how the portfolio rises in value as the S&P rises, and how the portfolio flattens out at what amounts to a 5.7% decline, while the S&P continues to fall; that’s due to a combination of our unique asset mix and the underlying put protection.
Here’s our latest macro and market update: