2020: A year of economic challenges and new financial opportunities

What a year we've just had, in every way. Market collapse at first, followed by a very strong rebound, lockdown, teleworking, kids at home, restaurants closed-open-closed-open-closed... Masks everywhere and almost permanently, hydroalcoholic gel, end of hugs and handshakes, keeping a distance, explosion of working hours for some professions, conversely partial or total unemployment for others, all in a climate of permanent paranoia. To think that all this fell on us in the space of a few weeks. A year ago no one had heard of this damn virus (except in the Chinese upper echelons). Let's not forget the American elections either, with a Trump getting crazier and crazier as the months went by.

Despite everything, I draw a positive conclusion from the determining portfolio during this very special year. Let us remember that its objective is to ensure the best possible performance, while preserving the volatility, in order to enable independence to be achieved as quickly as possible and a maximum collection rate during the withdrawal phase.

The collapse of the markets

The portfolio initially performed relatively well compared to the market during the stock market crash. Thanks to the strategy of capital protection and the diversification of assets, via thereal estate, gold and long-term government bonds, The loss during the crash was limited to about ten percentThe Swiss market, although defensive, fell at the same time by around twenty percent and the US market by 30%.

The rebound

Subsequently, the Swiss market rebounded strongly for two months, catching up with the determining portfolio, before more or less playing on a par with it for the rest of the year. The American market, on the other hand, started from a very low point and continued its wild ride for the rest of the year, apparently beating my portfolio and the Swiss index. However, this came at the cost of a devaluation of more than 8% of the dollar against the Swiss franc.

We therefore find ourselves in reality with an American performance almost equal to the Swiss market, with increasingly extreme valuations. PE Schiller Ratio has currently surpassed that of Black Tuesday and the Buffet Ratio is right at its all-time highs.

Difficult to interpret the performance

Ultimately, my portfolio lost 0.35% in 2020, which is decent given the circumstances. However, it is worse than the market, with a Swiss Performance Index which ends at +3.7%.

However, it is worth considering the price at which the latter result was made. As mentioned above, the stock market is at very high valuation levels. Central banks and governments have had to act simultaneously to save the day. Unemployment and debt have exploded in all countries.

Let us also note that if the American and Swiss indices did so well, it is because they were helped by technology stocks and pharmaceuticals. The STOXX Europe 50 index, which includes the 50 largest European capitalizations, for example fell by almost -8% during 2020.

Volatility: the portfolio keeps its promises

The other aspect to take into account is volatility. As we mentioned above, this was extreme during the first half of the year. Volatility is detrimental both in terms of the time it takes to reach financial independence, but also in terms of the possible withdrawal rate once it is reached (see e-book).

As you can see below, the volatility was very high in the market during the first half of the year. It was much higher than that of my portfolio, even during the second half of the year. The SPI thus went through a very bad month of October (in addition to that of March), falling by 6%, while the portfolio limited the damage, with -1.26%.

Monthly portfolio volatility for the full year was five percentage points below the market. The gap would have been even more significant with daily data, March having been terrible from this point of view for the stock market.

Positive outlook for the second half of the year

We can see that since April the Swiss market and my portfolio have been playing cat and mouse. Their respective performances are very close, but with a much more regular progression for the determining portfolio. Just a few days ago their performances over the whole year were identical. This is a very good result, especially since it had more than a third of cash up to this day!

This means that the decline in performance compared to the indices occurred paradoxically during the first half of the year, as I mentioned during my first interim assessment. I said then:

...in a market in a bubble situation like it is now, the only way to beat it is to play even crazier than it, that is to say speculate, by playing with leverage or by buying risky and/or even more overvalued securities. The fact that the market has lost a quarter of its value in four weeks reminds us that its foundations were not solid before the crisis. They are even less so now.

Adjustments for 2021

Another explanation for this relative underperformance of the portfolio compared to the market lies in one of its operating criteria, as I recently explained in the members section of forum. Some signals have until now been operating in an exclusively binary manner in relation to the level of asset valuation. I have corrected this for 2021 in order to still benefit from the momentum effect, while adjusting for the risk linked to valuation.

Historical performance and potential

Since the launch of the portfolio in 2010, this gives an average annual performance of 8.9%, compared to 8.1% for the SPI. My portfolio had about fifteen positions until 31.12.2020, with still a large third of cash as mentioned above. The growth potential is therefore very significant.

Income

In 2020, CHF 11,200 in gross income was generated by the portfolio. This is almost half compared to last year, which was a record. It must be said that in 2020 the share of assets offering little or no income was very significant, due to the reallocation of the portfolio.

This is not a problem. Indeed, as I explain in my e-book, I will no longer rely exclusively on dividends during the withdrawal phase, but also on capital withdrawals. Moreover, this situation is temporary and I have no doubt that income will pick up again very quickly. And then I will pay less tax for this year, which is always good to take.

Financial independence

This change of approach, with the withdrawal of capital associated with income, means that I am now able to become totally financially independent, thanks to the stock market investments that I mention here, but also to the income that I draw from real estate. In order to take this step, I still need for my mind to finalize my small business project ancillary activity independent. If all goes well, I will definitely pull the plug on salaried employment in 2021.

In the meantime, I wish everyone a great year and a good scholarship.