Performance 2021

Here is another year that ends during which my portfolio is overtaken by the market. This time the difference is not the least since the S&P 500 is close to 28%, the SPI with 23% and my PF barely reaches 5%. I had already mentioned it in first semester of this year, being already well behind at that point: if I were a fund manager, I would have already been kicked out.

What lesson can we learn from this? I have already pointed out many times that in a bull market, boosted for years by easy money, it is very difficult, if not impossible, to beat a 100% stock portfolio in buy&hold. Especially if this PF, like the current major indices, is mainly composed of growth stocks, which love to grow excessively, via debt, thanks to the abundance of liquidity.

So why not do like all budding new stock market traders, open an account with a broker like Robinhood and buy up stocks frantically? Tesla, Amazon or others? It's simple, accessible to everyone and very lucrative. Even after more than twenty years of investment experience, I still sometimes wonder about this today.

The first reason is that the policy of easy money seems to be coming to an end. Inflation explodes and the Fed recently announced that it would reduce its asset purchases. We are not yet in the phase of monetary tightening, but the American finance minister should stop, at least for a while, keeping the market on life support.

The other element that cools me down is the experience of the 2000s, which in many ways resemble the current period. Perhaps also - I would even say surely - that it is this "trauma" that explains why I am currently being beaten hands down by the market, and by force of circumstances by all the aficionados of the stock market doped with injections from central banks (hey, that reminds me of something else).

If I look more closely at my portfolio during this year 2021, I notice that it was heavily influenced by Japanese value micro-caps. Japanese indices lagged considerably throughout this year. Normally, favoring a top-down approach, I would not have invested as much in this market. However, faced with an excess of cash, combined with an abundance of nuggets on the Tokyo Stock Exchange, I have temporarily expanded my wallet eligibility criteria during the year.

In retrospect, I have to admit that this was a mistake, at least in the short term, since my portfolio (blue curve) was significantly influenced by the poor performance of Japanese small caps (dark brown curve), as can be seen in the chart below:

The difference with the S&P 500 (orange curve) is particularly marked from April. I continue to think that the Japanese value micro-caps that make up my portfolio are real gems. However, fighting against the market is useless. It is better to make it your ally. The overrepresentation of Japanese stocks was to the detriment of American stocks, practically non-existent in the portfolio during this year and this was strongly felt, as we can see in the graph above.

US indices, like almost all other markets, are in a bubble situation. It would be dangerous to throw the baby (Japanese securities) out with the bathwater and rush to join Uncle Sam's techno wave. We would then not only risk underperformance, but colossal losses. That being said, in order to optimize risk and performance, it is necessary to respect a certain balance between geographic areas. As we have seen this year, too much concentration is rarely a good thing. As I also mention in my work, portfolios composed of small caps of values with a balanced distribution at the international level, are those which benefit from the best profitability/risk ratio.

Therefore, my new objective is now to strengthen, but with caution, the presence of American stocks (I started doing this last December) and also a little from the old continent. I continue to focus above all on quality stocks, value and with momentum. The goal is, as in the past, to optimize performance, while preserving volatility as much as possible, by diversifying assets.

Still with the same aim, I am nevertheless now adding an ETF of growth stocks in tactical asset allocation. The position is largely in the minority given the current valuations. It aims, in the short term, to benefit in small doses from the strongly positive momentum of tech stocks. But it is especially in the long term that this position will be interesting, since it is likely to gain importance after the next stock market correction. Obviously, before this, when the momentum weakens, the position will become cash.

In addition, again and again with a view to improving the benefit/risk ratio, I add a US real estate ETF (in buy & hold) and I also diversify cryptos, by adding Ethereum and Solana (both in tactical asset allocation).

I ran some backtests against the addition of these minority positions. Each one manages to increase the portfolio's Sharpe ratio, even with a modest allocation. The weightings are set in such a way that they maximize gains while preserving risk as much as possible.

This represents a fair amount of new additions to the portfolio, but the overall allocations remain fairly similar to the past, as these new positions remain of low significance.

To return to the portfolio performance, and to console myself, I tell myself that 5%, this is already much more than what most mortals earn in their bank account. However, it is much less than my long-term goals. Since the launch of the portfolio in 2010, this gives an average annual performance of 8.5%, compared to 9.3% for the SPI. The launch of the determining portfolio in January 2020 should have improved this result, not lowered it. However, more hindsight will be needed to be able to judge its effects in the long term, as could be appreciated through the backtests used in my book.

On the other hand, in the clearly positive aspects for this year 2021, I was able to generate CHF 19,145 in gross income via the portfolio. This is 70% more than last year. From this point of view, small value caps, particularly Japanese ones, have played their role perfectly and demonstrate their importance. This is all the more remarkable since the portfolio included assets that did not yield dividends (cash, bitcoin and certain ETFs) for a large part of the year. This should allow me to start 2022 on the right track, since I have now entered the withdrawal phase and I am counting, among other things, on these distributions to live.

I would like to take this opportunity to wish you all a happy new year 2021. I hope that we can live normally again, without masks, without passes and, ABOVE ALL, without hassle!