Maximize Your Portfolio: Tactical Monthly Asset Allocation Strategies

Following the recent upheavals in the stock market, I have decided to further strengthen my tactical asset allocation strategy. The adjustments made last year as part of my portfolio diversification have borne fruit since thanks to them I was able to limit the damage (-2.5% against -5% on the market over the last month). However, given that I am considering a correction of greater magnitude and over a longer period, I have undertaken some fundamental adaptations in the management of my portfolio which should allow it to adapt even better in the future to different market situations. My objective is as much to prevent risks as to seize opportunities.

From now on I will first distinguish the equity positions of developed countries according to the regions: Switzerland, Europe, USA and Japan. Thus, if trend reversals only appear in certain places, we will be able to detect the signal early enough and reduce positions or move to cash, according to Meb Faber's approach. This can also be a leading indicator for other regions. As with other assets, I use different moving averages depending on the positions. I have indeed found that the 10-month average recommended by Meb Faber does not work optimally for all assets and indices.

As a reminder, I am not a huge fan of these technical indicators, however, as a good Swiss, I am also pragmatic. Having done many tests and as much research, I found that Meb Faber's methodology worked quite well. Nothing extraordinary in terms of profitability (only slightly better than buy&hold), but rather in terms of risk reduction. That being said, I wanted to go a little further, by adding fundamental criteria to weight the allocation of the different positions. So now, in addition to moving averages, I also use the Price-to-Book ratio to determine the distribution of stocks between developed and emerging countries. In addition, I now also take into account 10-year bond rates (Swiss Confederation) to decide the overall distribution between stocks and bonds, according to B. Graham's principles.

I also decided to add two small positions related to alternative type strategies, such as those used by hedge funds. Until now I have always considered that these approaches should be used separately from a portfolio with asset allocations, but recent events make me think that they can help reduce the volatility of the portfolio, particularly in the event of a market decline, or on the contrary to take advantage of opportunities during a recovery movement.

La première approche alternative est la stratégie long/short qui consiste soit à prendre en même temps des positions longues sur certaines actions et courtes ("vente à découvert") sur d'autres, ou alors d'alterner les positions acheteuses/vendeuses en fonction du marché. Personnellement, je m'amuse avec des paires d'ETFs comme SPY (1x) / SH (-1x) et SSO (2x) / SDS (-2x). Attention, il vaut mieux savoir ce que vous faites quand vous vous aventurez là-dedans. Si vous ne voulez pas trop vous prendre la tête, mais tout de même utiliser une stratégie de ce type pour diminuer la volatilité de votre portefeuille tout en maintenant une bonne rentabilité, vous pouvez vous orienter vers l'ETF FTLS qui joue dans les deux sens en utilisant une approche fondamentale, et qui se débrouille pas trop mal (5 étoiles sur Morningstar).

The second alternative approach is to take advantage of opportunities, using a leveraged ETF, in this case UPRO (3x). To determine whether the position is invested or cash, I use both Meb Faber's moving average approach and the fundamental Price-to-Book ratio approach. This means that this position is invested only during uptrends and its weighting varies from zero to several percent depending on the market valuation. In July 2009 for example, this position would have gone from cash to invested with a weighting of 10%.

What are the effects of these adjustments on my asset allocation? First, the target allocation for the four developed country regions (Switzerland, Europe, North America and Japan) is slightly decreasing, to 60% in total. I have decided not to break down the percentage for each of these locations. What matters is the total weighting in equities and the selection of quality stocks at low valuations. After all, we are looking for the best deals, whether they are from here or elsewhere. However, in order to help in this quest, I now give a rating out of five stars for each region, ranging from the least attractive (one star) to the most attractive (five stars). It should be noted, however, that it is possible to find opportunities in overvalued indices. The reverse is also true.

As for emerging countries, however, I continue to weight them separately. I consider them as a slightly different asset class. Given their fairly attractive valuation from a P/B ratio point of view, the weighting increases slightly, to 8%.

Apart from Europe, all equity positions remain invested, as Despite the recent decline, the long-term trend is still positive. For European stocks, you should either sell the corresponding ETF or start reducing your stock positions, i.e. get rid of the worst performers. As far as I'm concerned, there are British American Tobacco who is paying the price. This position was starting to get big because I had Lorillard a long time ago which was bought by Reynolds American, which was bought in turn by BAT. In addition, the dividend was reduced in 2017. I am also selling Astaldi due to lack of liquidity. Sorry for the readers who followed me on this last year. 

More generally, given the valuation of the market as a whole, it is appropriate, as always, to focus on stocks with low valuation ratios. There are not many left, at least in Switzerland and the USA. On the other hand, in Japan there is still plenty to do.

For long bonds, the position remains cash, because the trend is bearish and there are bad prospects on the horizon in terms ofinflation and therefore an increase in interest rates. The tactical weighting has also decreased from 10% to 6%, since I now also take into account the Confederation's 10-year rates to distribute the equity and bond portion.

Regarding gold, the position is also still invested and I am happy to have started it last year. No monstrous gain certainly, but it feels good in a portfolio when the markets are volatile. Same for real estate!

To conclude, I have only one regret, that of not having shorted bitcoin last December. And to think that I hesitated for a long time 🙂 ... But rest assured, it won't be here tomorrow!