Author: Joseph Ollis, Everyday Capital
Covestor portfolio: Everyday Portfolio
For the month of November, my model (performance at right) continues to be very defensive. The model has no high beta holdings, as it seems everything but short term bonds is currently demonstrating high volatility.
After a huge rebound in equities in October, it is hard not to believe that the bull market is going to resume. It is painful to sit on the sidelines in bonds while the market rockets higher. That said, even after the sharp move higher, equities have not reclaimed the high from August. In addition, volatility still remains high on both up days and down days.
You can read commentary from any number of places that gives evidence we are resuming the bull market or that we are just in a bear market rally. I don’t venture to guess which way the market is going to go. The Everyday Portfolio strategy is to reduce volatility and achieve a more linear equity curve. That is what it continues to do.
The Everyday Portfolio ranks assets using a mixture of past returns and volatility. Obviously, the Everyday Portfolio still ranks bonds higher than all equities because that is what the strategy choose for November. But it was interesting to see that “under the covers” large cap equities and real estate were close to being selected. This makes me optimistic that we may resume the bull market. If the volatility of equities stabilizes, the Everyday Portfolio will quickly ramp up in equities.
Continued Special Note
With the portfolio weighted nearly 100% in defensive positions, the model is saying volatility is at extreme highs and the risk/reward ratio for holding equities doesn’t make sense. During times like this, holding bonds feels like a double-edged sword. When volatility is higher, a flight to quality (US bonds) tends to take place, lifting the portfolio (good!), but being 100% out of equities means you don’t get to enjoy the first big bounce off of the lows (darn!).
Understanding this tradeoff is important, because the model will need to see sustained market improvements before jumping back into equities. That said, the goal of the model is a straighter equity curve with lower volatility to make it easier to sleep at night. And that, my friends, is what the Everyday Portfolio continues to do very well.
