Author: Joseph Ollis, Everyday Capital
Covestor portfolio: Everyday Portfolio
The Everyday Portfolio selects up to 11 assets from a diversified basket of asset classes on the final trading day of each month. The Everyday Portfolio underperformed the S&P 500 by just under 2% in December due to its heavy allocation in gold via GLD, which saw a significant drop of almost 11%.
January 2012 Portfolio Allocation
For the month of January, the model is increasing equity exposure to leading asset classes including large cap US, small cap US, real estate and the favorite emerging market of Malaysia. We are also removing exposure to Gold and lowering exposure to long term treasuries, which in recent months have seen more significant volatility.
Commentary
2011 proved to be a difficult year for many managers and strategies. The Everyday Portfolio held up throughout all the difficulty and volatility in the market. I am pleased with its performance. The goal of the portfolio is to sidestep volatile environments like what we saw in the late summer of 2011, while also participating in the market when volatility is lower like during the first half of 2011.
In October, the portfolio was 100% out of equities and in bonds. That made for an interesting month as the overall market had its largest single month gain on record of 11%.
The remainder of the year was a highly volatile back and forth in which the Everyday Portfolio held its own. However, this back and forth action is bad for the portfolio strategy as it causes whipsaws in and out of equities. Let’s hope this back and forth doesn’t last much longer.
Moving into 2012, the strategy remains the same for the Everyday Portfolio. We will continue to utilize the benefits of diversification through uncorrelated assets in our portfolio. We will focus on only those assets in up-trends and we will weight the portfolio more towards those assets showing lower volatility. In other words, we are making no changes for the portfolio strategy this year.
However, from a purely mechanical perspective we are going to make a minor change to our system. Instead of re-balancing at the end of the last trading day of the month we are going to rebalance at the end of the first trading day of the next month. This means we will use the weightings determined at the end of the last day of the month to rebalance the portfolio at the end of the day on the first trading day of the next month. This avoids late day volatility associated with the last day of a trading month, and will hopefully allow for a more consistent and timely rebalance.
Going into 2012 the portfolio’s bias is towards increasing exposure to equities. The portfolio is starting to add exposure to real estate and small cap US assets in addition to leading emerging markets. It is also reducing exposure to long term US treasury bonds due to the bonds’ high volatility. What is surprising is that these moves (increasing exposure to equities, reducing exposure to bonds) go against the mass financial media, which is focused on the Europe debt crisis and the ever increasing US debt.
The portfolio is adding real estate this month because the real estate index (as measured by IYR) has seen a substantial three month return while also having a strong 20 day return, suggesting that while the overall market was digesting the gains of October, real estate assets were actually going up. In addition, the real estate index has demonstrated lower 3 month volatility than most equity assets, making it even more enticing for the next few months.
