To The Moon

TL;DR:

- Current allocation: Long Commodities, Gold, U.S. Real Estate, and Cash

- Strategy: Add alternative assets and strategies to save your portfolio

Markets are in trouble 

This is the worst start to the year for the S&P500 in decades. Bonds have the worst YTD performance in 30 years. Without exposure to alternative investments, the world remains very tricky for investors. Volatility is high which means the daily swings are increasing. Even a balanced 60/40 had the worst start in decades. But this might not be it. Inflation is approaching 8% while interest rates are still below 1%. This means we have not entered the cycle of rising rates. The first signs of liquidity leaving the system might just be the beginning.

Source: Stockcharts.com

From a technical perspective, all stock indices are in a downtrend. 0% of developed market indices are above their 50-day moving average. 0% of developed market indices are above their 200-day moving average. More than 22% of Nasdaq stocks are down 75% or more. We are not just entering a bear market in stocks and bonds, it has been in play for months.

Source: Stockcharts.com

The regime remains risk-off. As a trend follower, you want to stay out of markets like these. The beauty of a systematic approach is that we don’t have the guess the bottom. We simply follow the rules of the system. Commodities and Gold are trending in their respective uptrends. Actually, this has been the best start to the year for commodities since 1960. Although real assets have been consolidating since April, their positive tendency remains and we expect the trend to continue.

Source: Stockcharts.com

Save your Portfolio

Long stocks and bonds strategies are going to have a hard time from here. Buying the dip, the favorite strategy during a bull market is also not working anymore. It’s time to find alternatives. So what’s saving investors right now are two things: 1) Exposure to alternative asset classes like commodities, 2) reduction or no exposure to stocks and bonds, and 3) getting exposure to alternative strategies such as trend, long/short, and market neutral volatility/vol arbitrage. The key is capital preservation! Protect your money and avoid loss by filtering out severe downturns. When the bottom is reached, we will get back into the market and compound for a once-in-a-lifetime opportunity.

As an asset class, commodities are segmented into four sectors: energies, industrial metals, agriculture, and precious metals. The beauty is that, historically, these four sectors have not neccessarily moved in tandem.

The Rise of Alternative Investments 

It is no secret anymore that there is a strong case for alternative assets. According to the Financial Times, the hottest thing in finance is not passive funds, crypto, or even commodities. It is private capital and alternative strategies — things like venture capital, infrastructure, private equity, direct lending, trend-following, and market neutral strategies — and it is absolutely booming. According to a study from Goldman, the overall size of the private capital industry rose to over $10tn in 2021. Industry data provider Preqin predicted that this will grow to almost $18tn by 2026. Other sources believe it could grow up to $30tn by then.

Stocks/Bonds at massive risk 

Buy and hold has been working remarkably well since the Financial Crisis. During the last 13 years, most investors made money (see chart below). There was no need for active management. Why would it when buying and holding an index generates satisfactory returns? However, looking a little bit further back in history shows that things can get a lot rougher. In the 1920s, 1940s, and 1970s, 60–80% of investors lost money over a 5-year horizon. Investors keep asking themselves if buy and hold is over because bonds won’t repeat their multi-decade bull market? We think that the risk is higher than ever and hence the core of each portfolio should be a diversified, multi-asset portfolio. We make the case for active management, maximum diversification, and systematic investing.

Source: Ray Dalio

Broadening the horizon

For most investors, diversification means holding a mix of stocks and bonds. For the last 13 years, this was certainly enough to generate remarkable returns. However, there is a case for broadening the investment universe by including alternative assets and alternative styles to the mix. Alternative asset classes include commodities, real estate, and private market investments. Alternative styles include trend, long/short, and market neutral volatility. This is real diversification.

The chart below shows the ratio between the S&P500 and commodities. There are long periods when stocks outperform commodities and vice versa. In the early 2000s, Commodities outperformed stocks for 9 years but for the last 13 years, Commodities had no chance against Stocks. This pattern is not only true for stocks and commodities. Similar charts can be drawn for all other asset classes. A properly diversified portfolio should not miss allocation to commodities.

Here is what a properly diversified portfolio looks like in numbers: The CAIA looked at historic returns of various asset classes. It shows how the addition of alternative assets can add value to a traditional 60/40 portfolio. Adding alternatives to the mix leads to a similar performance but a much better risk level (lower volatility and lower drawdowns).

Source: CAIA.org

Follow the trend and manage your risk 📈

Best, Sebastian