Articles on investing and capital management, with a quantitative focus.

#bigpicture - Big picture thoughts

Mid Year Report Card


I have several investment strategies, each covered in a different section of this web site. The "top level" asset allocation is PRP, and my other strategies fit within that. For example, part of my Canadian equity is invested in #xiutop.

Here's my Report Card, focusing only on 2020 (not the long term)

Strategy Grade Comments
#prp A+ Functioning better than expected
#xiutop A+ Functioning as expected
#bullsignals C Helped during crash, but underperformed
#growth A+ Continues to have great performance

A more in-depth analysis follows. This has been an absolutely crazy year in the market, with wild swings that nobody anticipated.

Permanent Risk Parity - #prp

My PRP asset allocation is based on the risk parity concept, and is very similar to both the Permanent Portfolio and All Weather.

To get a sense of how the PRP is doing, I'll compare it to the Vanguard conservative portfolio VCNS and the iShares 60/40 balanced portfolio XBAL. For the PRP performance calculations, I'm using my model (ideal) portfolio consisting of index ETFs. My actual investments are slightly different, but the performance is similar.

In the following tables, the measurement at March 23 (bottom in stocks) is shown. I also show Maximum drawdown: the worst loss seen along the way, from a peak to trough.

Measurement PRP VCNS XBAL
Return from Jan 1 to now +14.0% +4.0% +2.7%
Return from Jan 1 to Mar 23 -4.7% -12.2% -17.7%
Maximum drawdown -13.5% -18.0% -20.9%

All of these have done pretty well, and are positive this year. The PRP is doing very well in 2020:

PRP is doing exactly what risk parity is supposed to do: reduce volatility and perform reasonably well through rough patches in stocks, thanks to strong diversification beyond stocks.

For the 4.3 years that I have tracked this data, PRP has returned 8.2% CAGR. This is a great return for a conservative portfolio, and is in fact higher than the historical returns.

Top stocks of XIU index - #xiutop

This strategy aims to mirror XIU (the TSX 60 index) using individual stocks.

Measurement XIU
Return from Jan 1 to now -3.0% -3.6%
Return from Jan 1 to Mar 23 -23.9% -31.8%
Maximum drawdown -29.3% -35.5% has been doing well in 2020, slightly outperforming XIU and experiencing milder declines. The strategy is working well.

Algorithm-driven market timing - #bullsignals

This is my software driven market timing. The system gave a "sell" signal on March 9, and a "buy" signal on June 8.

Since I'm applying this market timing to the S&P 500 index, I've included SPY for comparison. Unlike the previous tables, these returns are in USD currency.

Measurement bullsignals SPY
Return from Jan 1 to now -15.0% +0.7%
Return from Jan 1 to Mar 23 -14.8% -30.3%
Maximum drawdown -24.6% -33.7%

This isn't great. The algorithm suffered from a severe whipsaw effect due to the extremely sharp rally after the Federal Reserve intervention.

On March 9, the sell signal looked perfect. The algorithm successfully got out of stocks before the worst part of the crash, as designed. You can see that at the March 23 market bottom, bullsignals had cut losses in half! Additionally, the maximum drawdown improved slightly.

Those are notable improvements during a market crash.

However, when the market rebounded sharply, the algorithm did not buy back in until very late. As a result, the overall return to today is poor at -15.0%, whereas the S&P 500 is actually positive!

The protection offered by the algorithm has been a bad deal in 2020. Risk was reduced, but the return was significantly reduced as well.

My portfolio of growth stocks - #growth

This portfolio's returns are compared to XIC, the TSX Composite Index.

Measurement Growth XIC
Return from Jan 1 to now +9.4% -4.4%
Return from Jan 1 to Mar 23 -29.8% -33.8%

Performance has been very strong, and my Growth portfolio is dramatically outperforming the TSX Composite. This strategy is doing well both from a risk and reward perspective.

Jem Berkes