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". Alors pourquoi utiliser cette méthode ? Parce que si la performance des suivis de tendance est à peine supérieure au marché, la volatility du portefeuille en est par contre réduite. Autrement dit, on améliore son ratio rentabilité/risque. Pour ceux qui s'en foutent de voir la valeur de leurs actifs varier de plusieurs dizaines de points de pourcentage ce n'est pas un critère important, mais la plupart des investisseurs ont une fâcheuse tendance à paniquer. Durant ces instants, ils prennent habituellement de très mauvaises décisions. Il est donc préférable de les prémunir de leur comportement schizophrène.

Voyons ce qu'il se passe au niveau des actions. Aux USA et en Suisse, pas de changement. Les indices ont certes commencé à baisser, mais la tendance demeure, pour l'instant, encore positive. Chez Trump, on sent le marché de plus en plus fébrile, un peu à cause de ses frasques, mais aussi parce que les cours sont toujours totalement déconnectés de la réalité (le ratio prix/valeur comptable moyen est de 3.2...). En Suisse, les cours sont un moins élevés (en moyenne 2.6 fois la valeur comptable) et la tendance résiste un peu mieux, pour le moment. Evidemment, malgré leur tendance encore positive, ces deux places sont à éviter tenant compte de leur prix.

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.

Comme je l'ai déjà expliqué par le passé, mon but n'est pas de battre le marché, mais plutôt de faire au moins aussi bien, avec une volatilité moindre et des distributions qui progressent. En ce qui concerne la volatilité, aucun souci, grâce aux différentes allocations actuelles (cash, actions, or, real estate). Au niveau des distributions elles ne cessent d’augmenter depuis plusieurs années, avec même un record l’année dernière. J’ignore encore si je pourrai faire aussi bien cette année, mais sur le long terme je suis clairement bien orienté.

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).

D’une certaine manière je suis tombé dans mes vieux travers, ceux qui m’avaient accompagné au début de ce siècle, lors de la bulle dotcom. J’ai donc décidé de ne plus investir de manière directe en Chine. Par contre, comme je crois aux vertus diversificatrices des pays émergents, je continuerai à y être positionné, mais dans une moindre mesure, et via un ETF (comme je le faisais avant). Pour cette raison, j’ai à nouveau détaillé les pays émergents des autres actions du point de vue de leur pondération.

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...