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.

Quelle leçon en tirer ? Je l'ai déjà maintes fois signalé, dans un marché bull, dopé depuis des années à l'argent facile, il est très difficile, pour ne pas dire impossible de battre un portefeuille 100% actions en buy&hold. Surtout si ce PF, comme les gros indices actuels, est majoritairement composé de titres de croissance, qui adorent se développer à outrance, via l'endettement, grâce à l'abondance de liquidités.

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.

Nasdaq

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.

De ce fait, mon nouvel objectif désormais est de renforcer, mais avec de la prudence, la présence de titres américains (j'ai commencé à le faire en décembre dernier) et également un peu du vieux continent. Je continue à me focaliser avant tout sur des titres de qualité, de valeur et avec momentum. Le but est, comme par le passé, d'optimiser la performance, tout en préservant au mieux la volatility, en diversifiant les actifs.

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.

De plus, encore et toujours dans un souci d'améliorer le rapport bénéfice/risque, j'ajoute un ETF real estate américain (en buy & hold) et je diversifie également les cryptos, en y ajoutant l'Ethereum et le Solana (tous deux en allocation tactique d'actifs).

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%, c'est déjà bien plus que ce que gagnent la majorité des mortels sur leur compte en bank. C'est bien moins toutefois que mes objectifs à long terme. Depuis le lancement du portefeuille en 2010, cela donne une performance annuelle moyenne de 8.5%, contre 9.3% pour le SPI. Le lancement du determining portfolio en janvier 2020 aurait dû améliorer ce résultat, pas l'abaisser. Il faudra néanmoins avoir plus de recul pour pouvoir juger de ses effets sur le long terme, comme cela avait pu être apprécié à travers les backtests utilisés dans mon ouvrage.

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!