It was a lousy year for the strategy. Check out the detailed stats here. Tl;dr: -19.75% in 2022, versus -16.32% for a global 60/40 and -18.17% for SPY. Not the end of the word by any means, but the last two years have been a far cry from the salad days of 2019 and 2020.

The portfolio behaved much better in 4Q22 as correlations across stocks, bonds and gold came down and risk assets rallied. I was pleased with 4Q22. No victory laps, though. It remained a bad year overall.

Current allocation:

Gross exposure is a smidge on the low side today. If the gold weight goes much higher, I’ll sell some and add back to NTSX to bring the gross up a bit. A new addition to the allocation is a Global Long/Short Value fund. I’ve been nibbling more and more at the value equity style as it has come back into favor.

The Big(ger) Picture

2022 was not a fun year. In fact, it highlighted the strategy’s most significant vulnerability: unstable correlations. The theoretical basis for this strategy is leveraging assets that tend to exhibit low correlations. If those correlations increase, and returns to the underlying assets are positive, the portfolio outperforms expectations. If correlations increase, and returns are negative, it underperforms.

This risk is the reason I limit the amount of leverage I will apply to the portfolio, even though more benign environments will always argue for higher levels of gross exposure (sometimes significantly higher). It is not worth the risk of ruin in my view.

There other are ways to manage this risk. They have their own pros and cons. Broadly speaking, these are different types of tactical overlay. Trend following, tactical asset allocation views and the like. While I will do some discretionary style tilting in this portfolio, more dramatic forms of discretionary tactical allocation are not something I intend to pursue here. This is meant to function as a simple portfolio core. I invest in a speculative portfolio alongside this. The galaxy brain investment ideas belong in that sleeve (in an ironic twist of fate, the public equity portion of that sleeve was -6.20% in 2022–significantly better performance than the leveraged permanent portfolio but still down for the year).

I have a complicated relationship with trend following. When I began this experiment, I used a trend and volatility targeting overlay. Ironically, in hindsight, I gave it up out of frustration after the 2020 COVID drawdown recovery. My approach was too slow adding back exposure. It has cost me a couple hundred basis points of annualized performance versus a static approach.

Obviously, the path the markets took in 2022 was quite different than 2020. Trend would have likely worked much better in 2022. Not so sure about the volatility targeting element, as the year was more of a grind down than a sharp selloff. Regardless, I think I have a behavioral preference for a static allocation. So I’m going to suck up the drawdown and soldier on with this static approach. I don’t want to repeatedly whipsaw myself tinkering with overlays.

Something I might consider is splitting some of the gold allocation across other liquid alternative strategies. Managed futures would be the leading candidate I think. I haven’t made up my mind about this though.

Ultimately, the purpose of this strategy is to harvest risk premia over long periods of time across assets that tend to exhibit low correlations. In that sense, I don’t believe anything is irrevocably broken here. It’s just been a bad run the last couple years.

The portfolio returned -6.64% in June. This compares somewhat favorably with most equity indexes. It trailed a simple global 60/40 mix, however.

Summary report with comparison statistics is available here.

Current exposures:

Not much to add by way of additional commentary for June. The gold weight has run down a bit but not quite to the level where I think it warrants a rebalance.

Late again this month due to some personal travel and an unexpected sinus infection. See here for the usual performance report. May was another uninspired month for the portfolio with a -0.95% loss versus modest gains for comparables. The portfolio definitely protected better than these benchmarks during June’s most volatile days. However, in the grand scheme of things it didn’t make that much of a difference.

Current allocation:

Note that this is as of the 06/24/22 close. June’s drawdown is reflected in these numbers. The most notable impact here is that gold’s weight increased a couple points versus the rest of the allocation, which had the overall effect of reducing gross exposure. You will notice a couple of new line items here also: an ex-US DM Value fund and a US Small Cap Value ETF.

Due to the quirks of my personal cash flow, I’ve had excess cash to invest during this period of market turbulence. One of the things I like to do to promote mental flexibility is add incrementally to strategies/assets that might benefit from a sustained regime change, if it seems a regime change could be underway (since we can only know for certain in hindsight). Different market regimes have different rules in terms of what will and won’t work. From a behavioral perspective, conditioning and reconditioning one’s self to the rules of a new regime is no mean feat. It takes time. It takes real dollars. Only real dollars will generate acute enough pleasure and pain responses to make the conditioning stick.

The role of a diversified portfolio core isn’t to outperform at any given point in time. The diversified core’s role is to be resilient and adaptive enough to keep you in the game across many different regimes. Also, if desired, to provide the capital base to take some big swings in the satellite portion of the portfolio. I don’t think I’ve ever come close to “cracking” the best way of integrating market feedback into a portfolio, but I know it’s something I want to continue to work on over time.