December 2022 Portfolio Review

That light at the end for the tunnel I wondered about in November is now making choo-choo noises. December was reminiscent of the summer, as most assets slid. RPC Stability still in first but RP portfolios with leverage are struggling.

I’m honestly a little confused trying to follow the expert explanations for the bad month. Is it that inflation is ratcheting downward (now annualized at 7.1%), meaning the economy is doing pretty well so it needs to be slowed down with more interest rate hikes? Or is a recession coming in 2023, so people are selling off while they can? Something else? Whatever the reason, December was like coal in the stocking, as the test portfolios were all down, from -2.7% for the “best,” all the way down to -7.7%.

Just about every asset in the portfolios was down for the month. Equities, most notably small-cap value, were down big time, meaning that leveraged ETFs like TNA and UPRO were disasters. Bonds were down a little bit, continuing the pattern of having positive correlation with equities in the negative direction, and provided no relief for the portfolio. Gold and managed futures provided a little bit of a bright spot, up 3% and .4%, respectively. Not enough there, though, to make a big difference.

Huge dividend payments in commodities and managed futures provided boosts of cash in many portfolios, and only one portfolio (the Golden Butterfly) actually had to sell shares this month in order to meet living expenses. All others had withdrawals covered by dividends and had extra cash that was used to buy more shares in the worst performing asset classes, thereby rebalancing the portfolios just a bit.

Speaking of rebalancing, I decided to apply the new rules of portfolio rebalancing that I explained back in early November to all portfolios. In short, asset classes more than 20% in relative terms away from their target allocation will now be rebalanced. Previously, I was testing this with two portfolios only, but the experiment has been going well for those two and the more I thought about it, I realized it was easier just to have uniformity. In addition, a few of the portfolios (mainly the ones that have leveraged ETFs in them) have gotten so far out of whack that they were becoming unrecognizable. The Leveraged Butterfly, for example, had all eight asset classes past the threshold, so it has been reset as it was at the beginning – though now with $232,000 less than it started with!

As for the Risk Parity scorecard, it was a good month for the safer RP portfolios in relative terms, even if it was still quite bad in absolute terms. The RPC Stability and Golden Butterfly tied as the two best portfolios this month with only a 2.7% loss, with the All Seasons in third. Those three and two more beat out the Classic 60/40, which was down 4.3%. The more aggressive RP portfolios, though, were terrible, and my beloved RPC Growth is now in last, having lost 34.2% since inception back in July 2021. Back then, I said I wanted to stress test my portfolios. The lesson, as always, is to be careful what you wish for.

Finally, I’ve basically thrown in the towel on cryptocurrency. It only appears in one portfolio, the RPC Growth portfolio, so thankfully, its pernicious impact has been limited, but with another horrible month (this time down 21%), I’ve decided to make some changes. I have reduced its target allocation from 2% down to 1%, and recall that that was a reduction from 5% at inception. I have split that percentage point between commodities and managed futures, so those are now at 9.5% each.