RPC Desktop: Random Notes - September 2022

Again a few things from the cluttered desk - none deserving of a full post, so I’ll just smash them together: 1) Rectifying a mistake and revising some hot takes, 2) Big story for me: the strength of the dollar, 3) Managed Futures continue to roll along, 4) prepare, don’t predict.

1) Check Yourself Before You Wreck Yourself

If you’ve been reading faithfully, you’ll know that I’ve been a bit like the guy who heads to the basement to find a small pool of standing water. Could it just be that the kids spilled a glass of water? Someone wrung out a towel at just that spot? Oh, no, there’s a leak. Check this, check that, look behind the water heater… remove some drywall…remodel the bathroom...replace the foundation. OK, finally fixed it.

Creative Commons, by Jakobpunkt

Had a similar experience with a post from August. You can read the details in the posts, but wanted to call attention to two re-written posts. Thought about re-releasing them, but this is more efficient.

First, the “Verdict on REITs” post - of the eight posts on REITs I have done, this is the one I’d recommend. Like Mr. Lebowski’s rug, it ties the room together:

The Verdict on REITs
And now, the end is near, REITs will face their final curtain: Should they be included as an asset class in a RP portfolio? Are they even an asset class at all? What might work better for making profitable and resilient portfolios?

This was the post with the mistake that launched it all, now revised:

REIT Fund Alternatives #3: Investing in individual REITs
Maybe I have been approaching REITs wrong - maybe it’s the packaging that is the problem, not the REITs themselves. In this test, I took an unusual approach (for me) - chose ten individual REITs to see how they might compare. Good news: better than VNQ. But there’s a catch…

I hope my mistake is all fixed now!

2) The Juggernaut Dollar

Had a nice tweet exchange with fellow blogger NA, who lives in Sweden, after he commented on the big slide of the Swedish Krona lately, an experience that I can echo living here in Japan.

As late as March 1st, it was at 115 yen to the dollar, which actually seemed pretty high (meaning weak) for me after what seemed like years in the 105 to 110 range. It now stands at 145, and that fact alone has thrown my investing plans into turmoil. I get paid in yen, and send back a set amount every month, and that amount I wind up with is now 25% lower than what it was just six months ago.

I’d love to be taking advantage of low prices right now in my real life portfolio, but I simply don’t have the month-to-month cash to really take advantage. Stocks are 20% off, but if it takes me 20% more yen to get them, then there really is no advantage. I’ve decided to not send more money back, but will just do the same as I have been and just hope that at some point, the yen will return to 110 (yes, I know, it may never!).

Of course, by the time the yen does go back to 110, stocks will have probably recovered. Thems the breaks, I guess.

The big picture is that I don’t know if many investors inside the United States have a sense on just how impactful the climb of the dollar has been, and what it might mean for other currencies. Great time to go buy a property in Portugal if you have USD, and a great time to buy small-cap value funds (like AVUV) that you’ll hold for two decades. For people elsewhere, though, it’s trying to keep heads above water and hope that things don’t go even farther sideways.

3) Managed Futures Chug Along

As mentioned elsewhere, my own real life portfolio is tilted a bit towards Risk Parity, but since I’m still very much in the accumulation stage, it isn’t too dissimilar from what many investors might hold. I’m 60% US stocks, 18% International, 10% bonds, and 12% alternatives. The Risk Parity approach is me thinking ahead to the decumulation stage and testing different assets and allocations before I start really investing that way. The principles of risk parity are important for all, but when you don’t need to live off your investments, you’re probably better off with a risk-tilted portfolio in the direction of equity risk. Recent events notwithstanding, that’s the bet most likely to pay off over a timeframe of 10, 20 or 30 years.

Until that stage, my allocation to gold, commodities, and others is still pretty minimal, but importantly, enough so that I can see its effect. This has been the case with managed futures, which I just committed to about about four months ago (see my primer on them here, and then my write-up of DBMF here). This seems to be the only asset class with consistent positive performance these days, well, maybe this and UUP. Here is a comparison between DBMF in black, and VTI in blue, over the past six months:

Source: Barchart

While my gain in nominal amounts is pretty small, the knowledge is valuable. It is performing as advertised and finding a return at a time when just about everything else is going to the dogs. The ability to short asset classes and go long on others is proving to be a reliable source of uncorrelated returns, over this timeframe anyway.

4) The New Tattoo on my Forehead: Prepare, Don’t Predict

I say this all the time, and it’s at the heart of my investing philosophy: I have no idea what the market is going to do in the future, whether near, medium-term, or far. Whether anyone has this ability is a matter of debate, but I can safely say I have absolutely no idea. That’s why I believe in risk parity principles, broadly speaking. My energy is best spent trying to prepare my portfolio for a variety of markets, rather than trying to guess what will be best suited for the market we “foresee” in the future. I call this the decathlete principle - I want a well-rounded portfolio prepared for whatever may come.

But merely saying this over and over evidently wasn’t enough, and now I need to get more creative. Why, why, oh why, did I offer a prediction last time that things were looking up after a strong July? I wrote that the leaderboard would soon shuffle, with the leveraged laggards rising to the top, and the stable portfolios slinking towards the bottom. I even gave dates, so there could be no wiggling around with terms like “soon” or “later.” No - I named January as the time when the aggressive portfolios would be back on top. Looking back, I fell into the classic trap of a bear market rally - and like a real bear trap, this one seems to have rusted iron spikes digging into my leg.

If no good deed goes unpunished, then no foolish, presumptuous, wishful thinking deed goes untortured.

A disastrous September has me wondering just how bad the portfolios will look when I go to examine the spreadsheet at the end of the month. It’s going to be bad… real bad.

Maybe tattooing it somewhere might help me remember:

Credit: Blackletter Font by Dieter Steffmann