In April 2022, I introduced on this blog The Italian Leather Sofa Model Portfolio. As a reminder, here is the portfolio composition:
- 60% stocks (via NTSX)
- 40% bonds (via NTSX)
- 20% trend (via DBMF)
- 10% commodities trend (via COM)
- 4% Tail risk (via TAIL)
- -34% cash
The idea behind the portfolio is stolen from here. The link offers the best explanation to what I think is the most common question related to it, i.e. why the portfolio use leverage (and why in this context leverage decrease risk).
It represents a simplified version of the portfolio I am building since I moved to Switzerland and that, ideally, one day will become the core of my assets (as of today I have 25% of my “unencumbered” asset, i.e. non-pension and non-real estate, invested along these guidelines).
Please note that the returns you find in the Model Portfolio series will always reflect the point of view of a USD-based investor. The ETFs are priced in USD and Composer, the app that tracks the portfolio, does not allow to change the reference currency. Besides these ‘technicalities’, the focus of this series is on how to build a great and simple permanent portfolio; there are various solutions an investor can employ in case they do not have the USD as their base currency and wants to eliminate the FX volatility. As I wrote here about the All Weather Portfolio, I am personally not bothered by the FX risk, given my investment horizon and the fact that I do not consider myself a CHF-based investor even if I live in Zurich. Plus, I do not have any currency-specific audience that would make this series more helpful if run in EUR, CHF or GBP.
In 2022, the portfolio lost 13.3% and in the first half of 2023 it recovered 9% after a positive Q4-22 [as a reminder, Composer allows users to share their symphonies models, send me an email/write in the comments if you want the link]. The performance is still c5% below the all-time high registered at the end of 2021.
The yellow line represents the Model Portfolio, while the other two are functional references (cannot really call them benchmarks): the 60/40 portfolio (blue line) and the S&P500 (red line).
Since Inception, including a backtest period
Q2
Since inception plus backtest (8th of May, 2019)
Below you can find details of each ETF performance, including dividends, in the quarter:
Below is the YTD price graph for each component of the portfolio
The SPY Sharpe ratio is improving, and catching up the model portfolio one, because its volatility is getting closer to its historical average, around 17%. Obviously, the index’s recent rally helped too 😉
2023 is shaping so far as another year where any investor diverging from US large caps looks foolish. Both the S&P500 and the Nasdaq are close to their all-time highs. The model portfolio was neck-to-neck the 60/40 last quarter and it is trailing that asset allocation since the beginning of the year.
I hear a chorus of “Why bothering then?”. The stock market spends the majority of its time UP, the S&P500 finished in the green 73% of the years. I will write about the model portfolio trailing stocks more often than not. The 60/40 is…so famous because it works as well most of the time. My goal here is to run an allocation that provides the smoothest run possible without leaving too many chips, as returns, on the table.
The benefit of a smoother ride, for example, is that if you are planning to use this portfolio for your retirement, the sequence of return risk gets way less dangerous and scary. If you are in the accumulation phase, you are less likely to sell everything at the worst possible time, the bottom. But you get haunted by FOMO. In the end, if this portfolio was perfect, I would only post pics of me foiling…
The VIX continued its downward trend, spending the whole of June below 15: volatility selling is again a fashionable strategy, let’s see how long it will last this time. Not sure if this calm was the main tailwind behind trend strategies but I’ll take it (it was not). COM performance was again a meh but commodities are still trending down/sideway, there is so much you can squeeze there.
At least in Q2 the FED increased my cost of leverage only by 25bps; the interest rate curve is still inverted though, meaning the bonds in the portfolio are generating a yield lower than my borrowing costs and will do for a long time if things do not change.
Overall, it has been a quiet and positive period. In past updates, I linked content from Cem Karsan because I find his “macro view” valid and thought-provoking. If the future is going to shape accordingly, the model portfolio should, at least that’s the idea, perform better than Total Stocks or 60/40 allocations.
I was thinking about refreshing on those developments as well, but then I realised it is beside the point. I am not a macro expert, I just have considerations. The model portfolio is built to be agnostic to macro developments, that’s the goal. The update I had in my mind covers how stocks or the combo stocks&bonds are ill-prepared to face an highly volatile inflationary regime. The model portfolio is a way to acknowledge the possibility that a particular scenario would materialise and be prepared for it. Again, the Four Quadrant approach.
The future will, most likely, surprise me but even in that case, the goal is to be invested in a portfolio that would prove to be resilient and reasonably performing.
What I am reading now:
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