Time for the usual monthly rebalance post. No changes this month. Technically, I should add a bit more cash based on trailing 12-month volatility. But the excess volatility versus the target threshold is pretty marginal, so I’m not going to worry about it this month.
Performance YTD and since inception remains solid. The characteristic performance pattern of this strategy is evident in the last few months. Equity returns with less drawdown. You get the downside protection when it counts, but tend to lag in strong equity rallies.
Of course, the real power of this approach is that it provides a source of liquidity for buying into significant market dislocations. For my personal portfolio, I pair this with a sleeve of concentrated individual positions.
I don’t write about that portfolio on here much, for a number of reasons. But pairing it with the leveraged permanent portfolio has allowed for an exceptional year thus far: +14.93% on an IRR basis, and +13.89% since inception about three years ago on an IRR basis. I use the IRR here because I control the cash flows into and out of this sleeve of the portfolio. The TWRs are lower, at +4.47% and +9.10%, respectively. Still nothing to sneer at, though.
The dramatic differences in IRRs compared to TWRs here illustrates the power of having a source of liquidity to buy into major market dislocations. I am increasingly convinced that there is not as much “irrational” panic selling in market dislocations as we might like to think. Most investors know they should be buying into crashes. They just can’t. They don’t have liquidity, either because they run fully invested or because they tend to experience other calls on cash during crisis periods. There is only so much you can do about the latter. Clearly, the former can be addresses through portfolio construction.
The other concept this illustrates is the time dilation we experience in markets. In periods of highly compressed market time, such as March, there are opportunities (risks) to generate outsize gains (losses). I believe it was Lenin who said: “there are decades where nothing happens and weeks where decades happen.” March 2020 was one of these times. A few weeks in March both made and shattered investment careers. This had very little to do with financial modeling skills and everything to do with the ability to adapt to the shifting tempo in the financial markets.
There are lots of ways to think about volatility from a conceptual view. Mostly it’s thought of as a risk measure. That’s a bit reductive. Volatility isn’t a measure of risk, per se. But it tends to be correlated with risk. It is better to think of volatility as a measure of time compression in the markets. When volatility is high, market time is compressed, and risks and opportunities are elevated. When volatility is low, market time stretches out, and risks and opportunities diminish. There is not enough written about the concept of tempo in investing. Maybe I will work on changing that.