Monthly Asset Allocation Strategies: How to Navigate a Volatile Market

The updated monthly asset allocation table is now available here.

"Sell in May, and go away"... It seems that this stock market saying wants to come true once again. Last month we saw a green turnaround in the trends of all indices, after several months of improvement. This month, it is almost exactly the opposite, since a good part of the stock markets are moving into a decline phase. This is the flaw in trend following: when the markets hesitate, torn between the forces of bears and bulls, the indicators can switch from buyer to seller, thus creating false signals.

This is one of the reasons (along with transaction costs) why moving averages do little better than the market, as has been shown J. Siegel in "Investing in Stocks for the Long Term". So why use this method? Because if the performance of trend following is barely higher than the market, the volatility of the portfolio is reduced. In other words, we improve its profitability/risk ratio. For those who don't care about seeing the value of their assets vary by several dozen percentage points, this is not an important criterion, but most investors have an unfortunate tendency to panic. During these moments, they usually make very bad decisions. It is therefore preferable to protect them from their schizophrenic behavior.

Let's see what's happening in stocks. In the US and Switzerland, no change. The indices have certainly started to fall, but the trend remains, for the moment, still positive. With Trump, we feel the market is increasingly feverish, partly because of his antics, but also because the prices are still totally disconnected from reality (the average price/book value ratio is 3.2...). In Switzerland, the prices are a little lower (on average 2.6 times the book value) and the trend is holding up a little better, for the moment. Obviously, despite their still positive trend, these two places should be avoided given their price.

Europe and the United Kingdom are still showing fairly decent prices overall, but the trend is becoming bearish. It is not yet very marked in Europe, it is a little more so among our English friends. As a safety measure, avoid investing there for the moment. Canada is resisting as much as it can, but is now hanging on by a thread. The positive trend is increasingly threatened and valuations are still a little too expensive (but not comparable to its southern neighbor). So you can invest there, but sparingly. The situation is the same in Australia, but for the moment I don't find anything interesting there, given the slightly too high price levels.

Japan. Ahhh, the land of the rising sun, its sushi, its sake, its geishas! What a mystery all the same... This market is full of nuggets sold off everywhere. The prices are only worth 1.2 times the book value. On average! That's to say how attractive the prices are, especially since this is not at the expense of quality, quite the contrary. And yet, despite the brief positive trend last month, prices have gone south again. I have just taken a position on a few gems and except big clash, I will keep them. I will present one to you again in the next few days. For the rest, I will remain circumspect and see how the market evolves in the coming times, although I feel like a kid in a toy store.

Emerging markets have given me a lot to think about lately... I was eagerly awaiting their return to favor during the last year and it seemed that it was a done deal at the beginning of this year. So I was very enthusiastic to return there but I must say that the disappointment was as great as my hopes, first because the prices fell, but also (and above all) because of their volatility, particularly exacerbated by considerations that were not economic, but political.

For several months, my portfolio's performance has been disappointing. It is not only negative, but also lower than that of the market. This can be partly explained by the fact that I have reoriented my assets towards less fashionable stocks, particularly outside Switzerland and the USA. As we are still in a bull market in these regions, my portfolio is therefore struggling to keep up. This does not worry me too much because the extreme valuations that are rife in these countries are not sustainable in the long term. On the contrary, if I take the example of Europe and especially Japan, the quality/price ratios are clearly more favorable. There will therefore have to be a rebalancing of prices based on the fundamentals in these different regions. It is only a matter of time.

As I have explained in the past, my goal is not to beat the market, but rather to do at least as well, with less volatility and increasing distributions. As for volatility, no worries, thanks to the various current allocations (cash, stocks, gold, real estate). As for distributions, they have been increasing for several years, even reaching a record last year. I still don't know if I will be able to do as well this year, but in the long term I am clearly well oriented.

In terms of performance, I beat the market for many years, but for some time now, especially since I reallocated my assets outside the US and Switzerland, I have been struggling. This is not serious as such, for the reasons explained above. On the other hand, I note that this underperformance comes mainly from stocks in emerging countries in which I have started to invest more than usual due to their valuation and technical trend. However, these stocks have a volatility that happily exceeds what I am used to (in addition to being subject to political manipulation).

In a way, I fell into my old ways, those that had accompanied me at the beginning of this century, during the dotcom bubble. So I decided to no longer invest directly in China. On the other hand, as I believe in the diversifying virtues of emerging countries, I will continue to be positioned there, but to a lesser extent, and via an ETF (as I did before). For this reason, I have again detailed the emerging countries of other stocks from the point of view of their weighting.

Finally, we come to the other assets. Concerning the long-term bonds of the Swiss Confederation, the long saga of discriminatory rates continues. The 10-year rate is now at -0.445%. (Libor is right at -0.8%). No need to draw you a picture, we'll forget about bonds for quite some time.

Gold... to say that I was a fierce opponent of the yellow metal a few years ago. Its price relative to the stock market is very cheap and its trend is well oriented. My target allocation is only 6% (because it does not pay a dividend), but I must say that associated with cash reserves and real estate, it does good in a portfolio when the markets are nervous as they are currently.

Real estate, my only permanent allocation line, has continued to perform very well since the beginning of the year (gain of 8%).

Finally, the cash reserve target is climbing again, to a total of 17%, due to the deterioration of indicators at the stock market level. My actual allocation to cash is still higher anyway, around 25%. If the bad trend continues, I will be happy not to be too exposed to stocks, if it picks up again I will have enough to seize opportunities.

Let's see what summer (which is finally starting to show its face) has in store for us...