Any thoughts on portfolio rebalancing and frequency? Do you trim your tactical portfolio and transfer your profits into your long-term strategic asset allocation portfolio? If so, aren't you jeopardizing the beauties of compounding if you happened to be successful trading 10% of your capital? If not, how would you handle the eventual over/underexposure?
Hi Alf, Thanks for what you are doing here. I have not long been investing in a personal pension and you have given me some food for thought and helped me look at it differently. Can i ask what is your time horizon for your long term investment? The 70/20/10 portfolio. Would you use the same stretegy over 15 years or so?
Hi Cliff. Using a 15-20y time horizon, the most important thing for me is to be invested and harvest risk premium in the first place.
The 70/20/10 portfolio will likely deliver lower returns adjusted for inflation over the next 15-20y compared to the previous 15-20y, but I still believe it will succeed at protecting my purchasing power over a long-time horizon.
Thank you for sharing this information for free, Alf! You have a very unique educational yet enjoyable writing style.
I have a question regarding the long-term portfolio. With the high probability of rising real yields decreasing stock market valuations, declining economic growth and ever-rising threat of deleveraging à la Japan you outlined in your other work, do you think it makes sense for an average person not yet invested in the stock market to wait in cash (and say bonds + gold) and to postpone their investment? It does not seem smart to invest now at ATHs given this analysis.
Hi Alfonso! I want to congratulate you on the articles, they are a great source of insight! I have a question on the long-term structural portfolio: do you invest regular amounts each month/period into it (dollar-cost averaging) or pursue a different approach? If you allocate funds regularly to it, then my follow-up question is: how do you proceed in these times in which in article #5 you say it would be best to go fishing?
Yes. Actually you could switch equities to unhedged (so, getting the ''benefit'' of an appreciating USD while equities fall) and lower the % of your defensive asset classes and saving some running costs as the EUR hedged version of the MSCI World tracker is more expensive than the unhedged due to FX costs.
Hi Alfonso! Fantastic series of articles, with a truly generous content! Thank you, I will start to share them ASAP, tomorrow the latest.
Concerning your passive allocation, I was wondering, why wouldn't you go with a risk parity portfolio or at least a portoflio that has more parity in terms of risk among the asset classes? Taking your example, I would go more like: 25% equities, 15% gold, 40% US Treasuries, 20% Commodities.
Sure, the expected return may be a bit lower, but wouldn't diversification help to boost the Sharpe ratio a bit, thus allowing for little of leverage for an investor liking more risk?
Ciao! Thanks for the kind words and I'd love if you would share the newsletter on your social media and with your network.
Part of the answer is: because I am 30y old, hence I am happy to take a bit more risk and this allocation provides me with solid returns and drawdowns I personally deem acceptable. Your comments are smart and this is not meant to be a 1-fit-for-all asset allocation.
The most important part is to escape negative real interest rates and actually put your money at work. Under which SAA and strategy, it depends on a lot of factors.
solid summary and appreciate thought process. one comment…surely the 8% return from 70/20/10 portfolio will be difficult to replicate in next 5,10,15yrs, no? given asset valuations would seem the buy/hold portfolio locks you into low single digit returns. why not allocate more to global macro portfolio to out earn low single digits? move to 65% long term portfolio, 35% macro/tactical. i suppose it depends on what your expected return is on macro/tactical sleeve…but i’d guess return is as high or higher than long term portfolio right now.
I'd expect less than 8% nominal returns, indeed. I can only say that achieving the same (or better) returns with the same (or lower) risk with the global macro portfolio has proved to be very challenging over the past years.
Hi Alfonso, what an interesting article! I would be very interested to hear what could be according to you a "way out" to avoid the "financial destruction" you mentioned above.
Also, if we are heading to a "financial destruction" what would happen to a long term portfolio? Is this the end of the 70/30?
My compliments again for this newsletter, and for your style clear and structured at the same time. Well done. Ciao, Adriano.
Hi!! In this article (in spanish) they justify that is better to have equities not hedged and bonds hedged. Why do you use this strategy?
Thanks
https://blog.indexacapital.com/2017/09/11/fondos-con-sin-cobertura-divisa/
Ciao Alfonso,
Any thoughts on portfolio rebalancing and frequency? Do you trim your tactical portfolio and transfer your profits into your long-term strategic asset allocation portfolio? If so, aren't you jeopardizing the beauties of compounding if you happened to be successful trading 10% of your capital? If not, how would you handle the eventual over/underexposure?
Grazie!
Ciao Andrea!
Solid questions: I'll try to address them in one of my next educational articles about risk and portfolio management.
Thanks Alfonos, You trade 1+ months. You get the Volatility on these time frames? hence the probability is there to make money?
Hi Alf, Thanks for what you are doing here. I have not long been investing in a personal pension and you have given me some food for thought and helped me look at it differently. Can i ask what is your time horizon for your long term investment? The 70/20/10 portfolio. Would you use the same stretegy over 15 years or so?
Hi Cliff. Using a 15-20y time horizon, the most important thing for me is to be invested and harvest risk premium in the first place.
The 70/20/10 portfolio will likely deliver lower returns adjusted for inflation over the next 15-20y compared to the previous 15-20y, but I still believe it will succeed at protecting my purchasing power over a long-time horizon.
Thanks, much appreciated.
Thank you for sharing this information for free, Alf! You have a very unique educational yet enjoyable writing style.
I have a question regarding the long-term portfolio. With the high probability of rising real yields decreasing stock market valuations, declining economic growth and ever-rising threat of deleveraging à la Japan you outlined in your other work, do you think it makes sense for an average person not yet invested in the stock market to wait in cash (and say bonds + gold) and to postpone their investment? It does not seem smart to invest now at ATHs given this analysis.
Thank you again!
Hi Miroslav! You are raising a great point, which I will cover in my next article early Jan 2022. Stay tuned, and thanks for your kind words!
Is it possible to become wealthy as an Italian citizen living in Italy? The tax rates are quite high
Hi Alfonso! I want to congratulate you on the articles, they are a great source of insight! I have a question on the long-term structural portfolio: do you invest regular amounts each month/period into it (dollar-cost averaging) or pursue a different approach? If you allocate funds regularly to it, then my follow-up question is: how do you proceed in these times in which in article #5 you say it would be best to go fishing?
Hi! Yes, I do invest regular amounts each month/period. But every single person might have different personal preferences.
I do that regardless of market conditions for 90% of my savings.
The remaining 10% is invested in a discretionary long/short global macro portfolio. For that part, there is a time to go fishing :)
But for 90% systematic investment of my savings, there is no ''market timing'' exercise.
Hi Alfonso, thanks for your article. I look forward to seeing more.
I had one thought on your strategic allocation. Did you think about running the equity exposure unhedged, and the bond exposure hedged?
Yes. Actually you could switch equities to unhedged (so, getting the ''benefit'' of an appreciating USD while equities fall) and lower the % of your defensive asset classes and saving some running costs as the EUR hedged version of the MSCI World tracker is more expensive than the unhedged due to FX costs.
Hi Alfonso! Fantastic series of articles, with a truly generous content! Thank you, I will start to share them ASAP, tomorrow the latest.
Concerning your passive allocation, I was wondering, why wouldn't you go with a risk parity portfolio or at least a portoflio that has more parity in terms of risk among the asset classes? Taking your example, I would go more like: 25% equities, 15% gold, 40% US Treasuries, 20% Commodities.
Sure, the expected return may be a bit lower, but wouldn't diversification help to boost the Sharpe ratio a bit, thus allowing for little of leverage for an investor liking more risk?
Grazie e saluti dalla Svezia! :-)
Ciao! Thanks for the kind words and I'd love if you would share the newsletter on your social media and with your network.
Part of the answer is: because I am 30y old, hence I am happy to take a bit more risk and this allocation provides me with solid returns and drawdowns I personally deem acceptable. Your comments are smart and this is not meant to be a 1-fit-for-all asset allocation.
The most important part is to escape negative real interest rates and actually put your money at work. Under which SAA and strategy, it depends on a lot of factors.
solid summary and appreciate thought process. one comment…surely the 8% return from 70/20/10 portfolio will be difficult to replicate in next 5,10,15yrs, no? given asset valuations would seem the buy/hold portfolio locks you into low single digit returns. why not allocate more to global macro portfolio to out earn low single digits? move to 65% long term portfolio, 35% macro/tactical. i suppose it depends on what your expected return is on macro/tactical sleeve…but i’d guess return is as high or higher than long term portfolio right now.
I'd expect less than 8% nominal returns, indeed. I can only say that achieving the same (or better) returns with the same (or lower) risk with the global macro portfolio has proved to be very challenging over the past years.
Hi Alfonso, what an interesting article! I would be very interested to hear what could be according to you a "way out" to avoid the "financial destruction" you mentioned above.
Also, if we are heading to a "financial destruction" what would happen to a long term portfolio? Is this the end of the 70/30?
My compliments again for this newsletter, and for your style clear and structured at the same time. Well done. Ciao, Adriano.
Ok, this could be a good idea for the next TMC article. Thanks for the kind words!