THE determining portfolio continues to resist the market's upheavals as best it can, during a month of September marked by a new sharp rise in rates in the USA and "partial" mobilization in Russia.
Despite a new plunge in global stock markets, the PF's performance since the beginning of this year amounts to -6% compared to -22.8% for the MSCI Switzerland index. Volatility remains at a reasonable level, with 10.6% compared to 20.1 % for the aforementioned index. The relatively good performance is explained by the resilience of Japanese microcaps, High Yield corporate bonds introduced last month and other assets/strategies (in the real test phase), some of which are becoming productive and are detailed below.
In september, I told you about a new asset, still in the exploratory period, that I hoped to be able to offer you this month. The tests are still ongoing. The backtests and indicators show undeniable potential that would really do good in the portfolio at the moment. I am at the end of my rope to offer it to you. I hope I will be able to introduce it next month. In the meantime, it continues to appear in the portfolio as "Asset in test", just before reserves and liquidities.
US Utilities
That being said, I am taking the lead this month with another instrument of interest: US utilities. These have a low correlation (0.45) with the US stock market. It is almost as if we were dealing with a different asset class than stocks. This therefore makes them an instrument of choice for diversifying the portfolio. With "Utilities", we are in the world of large companies, which also brings a bit of variety to the portfolio, which is mainly oriented towards microcaps.
"Utilities" perform very well as a tactical asset allocation. We can also use the moving average of their prices in conjunction with that of the American unemployment rate. The defensive side of public services is also appreciable during phases of economic slowdown. Especially since they offer a regular dividend that is higher than the market.
On the negative side, utilities are generally very sensitive to interest rate increases. This is due to significant debt (related to expensive infrastructure) and arbitrage with treasury bonds. So, a priori, the current period is not the most favorable for public services.
However, despite this, this asset is holding up quite well compared to the market. Investors are indeed subject to a lot of uncertainties (inflation, rate increases, war, fear of recession) which pushes them towards assets considered safer such as public services. In addition, their current growth is favored by the demand for renewable energy, which has increased significantly due to global warming and the disruption of supply chains caused by the pandemic and war.
Short selling of assets
During this summer's backtests, I was also able to highlight the good behavior of some instruments not only in asset allocation, but also by resorting to short selling (rather than cashing them). This is timely since most of them are failing.
The position and ETF of the assets concerned will now be indicated in red, when the signal is bearish. This means that you must either short the ETF or buy the inverse ETF. Those who do not wish to play against the market can simply stay in cash.
For example, you have a position on the Nasdaq via the QQQ ETF. In the current month, the determining portfolio indicates:
Actions - Nasdaq 100: 
At the beginning of the following month, the signal regarding this asset changes. The index includes the mention "(Short)" to its right. The position turns red and indicates to short the ETF concerned or to invest in its inverse:
Stocks - Nasdaq 100 (Short): 
You can then, depending on your preference:
- sell QQQ short (thereby closing the long position)
- sell QQQ and buy PSQ
- sell QQQ and stay Cash
Note that it is possible that the short position (just like the long position) goes to Cash, if the instrument is not among the best performing assets:
A number of instruments also do not react optimally to short selling, according to my backtests. For these too the position goes to cash when the signal becomes unfavorable.
Inverse ETF vs Short Selling
Inverse ETFs allow those who can't - or don't want to - short sell to still play against the market. However, short selling, rather than trading an inverse ETF, saves a bit on transaction costs, as well as management fees.
It should also be noted that inverse ETFs are designed to replicate the opposite of the index over a day. As the days go by, the performance moves further away from that of the short. Therefore, they are better suited to day traders than swing traders.
Another advantage of short selling is that you don't need to have any cash to trade, aside from the initial margin required. You'll even get money back, since you're "selling." Therefore, when the position goes "Short", its allocation becomes negative, since it constitutes a liability. With the cash that is received in an equivalent proportion, the total of the operation is zero.
The cash obtained from short selling can be kept as cash or reinvested in other assets. If kept as is, money is made. when the short position loses value (which reduces the liability). The cash kept warm will allow the position to be bought back later, without having to buy on margin (unless the instrument increases in value and there is no additional cash).
If they are used to purchase other assets, we take advantage of it if the asset (long positions) outperforms the liability (short positions). We therefore find our account there as long as the cash from the short position is invested in an asset that outperforms the stocks that were shorted, even if the stocks increase in value. Thanks to the leverage effect induced, the investor thus benefits from both sides of the transaction (long and short). However, he can also lose on both sides. To buy back the position, if there is no cash available from other sales (or short sales), it will be necessary to use the margin, at least temporarily.
The results of the backtests and real tests carried out with the determining portfolio are sufficiently robust to allow us to use the excess cash from short selling. This is therefore distributed at the target weighting of the other assets in the portfolio, rather than being kept in cash. However, if you prefer, you can of course keep this cash warm.
It is often said that it is less risky to buy an inverse ETF than to short the index because with the former the losses are limited to the amount invested, while with short selling they are potentially unlimited (there is no ceiling on the progression of an asset).
It is true that shorting a stock can be particularly dangerous in this respect, for example in the event of a company buyout. However, stock indices rarely rise sharply. On the contrary, they tend to fall quickly before rising more slowly. In addition, potentially short positions remain a minority in the portfolio. They therefore serve primarily as a hedging instrument, which tends to reduce risk and volatility rather than the opposite. Since you can never be too careful, I nevertheless recommend placing a trailing stop order to buy at 20% above the price.
Final word
The current period is particularly difficult for the stock market and there is no sign of a lasting reversal of the trend in the short term. Despite an already significant decline, valuations remain high. The geopolitical and economic context particularly raises questions, not to say concerns. Galloping inflation, rising interest rates, the war in Ukraine, growing tensions around Taiwan and difficulties in supplying raw materials mean that any asset and any strategy are potentially threatened. Even cash.
In this context, it is appropriate, even more than usual, to diversify approaches as much as possible. The various changes undertaken this summer are precisely in this direction. They aim to maximize the overall performance of the portfolio, while minimizing its risk.
Discover more from dividendes
Subscribe to get the latest posts sent to your email.
Français 
English 
Italiano 
Deutsch 
Español 
Português
Hello Jerome!
And yes, it's hard at the moment. There is nothing that is profitable, except perhaps, when you are in the euro zone, having bet on the dollar a few months ago... Well, that compensates for inflation... For the moment.
In short, the +0% (or let's say >-10%!) objective is already very good in this kind of period!
Hi Thomas, it's better to clench your buttocks!
We have to see the positive: we should eventually see more correct valuations.
Hello Jerome,
It is possible to invest in utilities in a company with no debt: TINC.BR listed on Euronext Brussels.
https://www.tincinvest.com/fr-be/the-infrastructure-company/
Tell me what you think?
Thierry
Hello Thierry, thanks for this input. I didn't know this company, which apparently includes more than just public services. We are already at the level of infrastructure. As it is an investment company, it is more difficult for me to comment on the fundamentals, but indeed the absence of debt is a very good point. The other good point is the low volatility, associated with a low beta and a very generous return. It is certainly good to take in these times...
Hi Jerome,
Thank you for all this useful and interesting information!
In the table, the valuation and momentum correspond to the short position when that is the one indicated, correct?
Regarding margin accounts, do you have any specific recommendations other than trailing stop loss?
For now I still have a cash account with IBKR, but it is eligible for both types of margin accounts. The Portfolio version seems a little more interesting to me. Is that the one you use?
Thank you!
Thierry
Hi ThierryC
yes, indeed, the valuation and momentum correspond to the short position when it is indicated.
No other recommendation apart from the trailing stop loss. Obviously the short position must remain in the minority, just like in the determining PF.
Yes I have the margin portfolio.
A+
Thank you Jerome!
Absolutely, I have no intention of using leverage other than possibly through position as you suggest in your article.
Hi Jerome and other investors/traders,
After several readings to consolidate my knowledge on short selling and margin trading, 3 questions come to mind:
1) When comparing short selling an ETF or buying the inverse ETF, do you take into account the possible costs associated with borrowing the shares (Borrow Fee Rate vs Sale Proceeds Interest Rate)? Even if the ETFs in question are "easy to borrow", there will be, as far as I understand, no interest credited on the cash received from the sale given the modest sums involved, i.e. only daily fees.
2) Since the portfolio is now using share borrowing, wouldn't it be wise to subscribe to IBKR's (or another broker's equivalent) "Stock Yield Enhancement Program" to participate in this market as a lender as well?
3) What do you think about a trailing stop LIMIT loss instead of a trailing stop loss? For short selling an ETF like TLT, setting a limit does not seem very useful to me or even counterproductive (given the high liquidity, modest volatility and to avoid the residual risk of crossing the limit). I ask myself the question more generally (e.g. long position or slightly more volatile ETF), because it is very common for there to be a (small) rebound just after a big bullish or bearish movement that would cross the stop AND the limit. In other words, if the limit (stop offset) is not too small (e.g. > 0.1*volatility), it is quite likely that it will take effect shortly after being "crossed". Obviously, it does not protect against a short squeeze like "GameStop", but we are not here to play that kind of game (no pun intended)...
Thank you for your feedback.
Thierry
Hi ThierryC,
Very good questions. Here are my answers:
1) ETF borrowing fees: yes, I took them into account, both in my backtests and for the comparison with an inverse ETF. The fees for shorting very liquid ETFs are low, most of the time much lower than the management fees for inverse ETFs. Example for TLT: expense ratio 0.15% + current short fee 0.3% = 0.45%. For the inverse ETF (TBF), the expense ratio is 0.9%, not to mention that the performance vs TLT will decline as the days go by, since it replicates the inverse performance intraday (effect of compound interest). For DBC, currently the short solution is more expensive than the variant via the "inverse" ETF (SCO). However, SCO is not an optimal replica because it only concerns oil and not all commodities. For the majority of other cases, shorting is cheaper than buying the inverse.
2)Stock Yield enhancement: this is a matter of personal taste, as far as I am concerned, and it is perhaps a bit selfish of me, I do not want to participate in it. I control my shorts, because they are linked to large, very liquid ETFs and they are largely a minority in my portfolio. It is a calculated risk. On the other hand, I do not control what other investors do with my investments, particularly my stocks.
3) trailing stop limit: not necessary in my opinion. There is already little chance that the normal trailing stop loss will be reached, since it is set very wide (20%) and it is placed on indices (and not stocks). The ETF will be closed normally before reaching the TSL, during the monthly closing. The purpose of this order is mainly for peace of mind, since theoretically, losses with a short are unlimited. But it remains an essentially theoretical risk. For the other cases that you cite, in particular long positions, to avoid the inconvenience of inopportune triggers, I prefer to use the method of manual monthly trailing stop losses, as explained in my book and used in my portfolio.
Hi Jerome,
Thanks for your answers. Some comments/questions:
2) Stock Yield enhancement: this doesn't seem particularly selfish to me. After all, everyone is free to choose to use what suits them while respecting the rules of the game. 😉
But if I understand correctly, you judge that the measures taken by IBKR (eg, margin) are not sufficient to guarantee with a very high probability that your securities will be returned to you?
3) Trailing stop limit: OK, thanks for the confirmation. I had read that you prefer to do this manually, but I was wondering if you sometimes make exceptions. I agree with you about the inopportune triggers. The only real advantage I see is to eliminate the emotional / possible hesitation (+ simplify the management, but it comes at a price).
A) TLT's trend has reversed. Do you think (bet) that it will go back down at the next FED announcement on December 14?
(if +0.75%; because +0.50% seems to be what is expected so I wouldn't be surprised if confirmation pushes TLT higher even if it means the market is anticipating too much).
Otherwise, wouldn't it be wise to dispose of it before the "dividend in lieu" is paid?
B) Some points about the announcements of your portfolio movements:
– Do you usually publish the announcement within an hour of the purchase/sale? I am wondering because I received the info for ADV after the stock market closed (I assume you do not trade outside regular hours?). My question is mainly to judge how much the price has deviated in the meantime.
– Previously you indicated whether the purchase is rather speculative (mainly linked to momentum) and if not a link pointed to the indicators you use. ADV for example is rather a “momentum” purchase than a “value” one, isn’t it? Its fundamentals seem to me to be less good than most of the other stocks you select.
– Would it be possible please to specify as before the (beginning of) name of the action in addition to the ticker + Stock Exchange? Of course, the risk of a typo or a bad reading is very slim in addition to a check that the investment suits us, but you never know.
Thank you very much and have a good weekend in advance!
Thierry
Hi Thierry, here are my answers:
I'm not judging anything. I just think that for peace of mind I prefer that these securities not wander around in the wild, especially if it's just to earn a few pennies and in addition the securities are no longer guaranteed by SIPC.
I make one exception: during the short sales recently introduced on certain asset classes. In this case I set a TSL at 20%.
Yes, it is an advantage, indeed. But at the same time, once you get used to managing it manually, you become much less "attached" to your titles. I no longer have any qualms about getting rid of them, quite the contrary.
I'm not judging or betting anything. I'm just following the momentum.
I would have said the opposite. If the rate goes up more than what is anticipated in the prices, the price of current Treasury bonds will fall to adjust to the new rate.
What will determine the choice for now is the momentum when closing at the end of November.
In principle yes, but it can actually happen that there is sometimes a slight lag. This is not of great importance in the short term: small price variations can worsen or improve the "value" of the security, but at the same time improve or worsen its momentum. It's the game of communicating vessels.
you just assume
Yes, well seen, indeed. It is even pure momentum. I will specify in the future if necessary.
No problem. If I forget, don't hesitate to remind me 😉
Have a good weekend
Good morning,
Thank you for this article and this update of the determining PF… I admit that I have not yet understood everything with these margin loans on TLT or DBC which are new to me…. So I lightened DBC by selling directly without a loan….
I have two questions.
1) A question concerning the content of the determining PF invested in the stock market vs. other assets that one may have (e.g. share in a real estate fund with a yield of x%/year paid quarterly; rented real estate generating rental income in Switzerland or abroad; loan of money for real estate crowdfundings remunerated monthly e.g. at 10% etc.).
For you, Jérôme, should these other asset classes also be taken into account in a determining PF or not? Do you count them "separately" from the stock market PF?
I am asking you this question deliberately because this year, given the complicated stock market performance, other assets (rental property on credit or loan for real estate crowdfunding) make it possible to improve the overall return on your assets... by putting the two together.
And from the perspective of "living off one's income", these asset classes linked to real estate seem important to me to integrate because they allow for payments that are sometimes monthly and often uncorrelated with the stock markets.
2) I also ask myself the question of the weight that the main residence must/should represent (considering that one is the owner) in the net capital including the stock market PF + other real estate investments + possibly side job/business that one keeps as a supplement to income.
Indeed, the capital of one's RP, even if significant, cannot/will not be able to help when one wishes to live off one's income (immobilized capital)...
Currently, for my part, considering the LPP assets (2nd pillar) and the 3rd pillar payments as capital placed in my RP (because already withdrawn at the time of purchase or in the process of withdrawing them in 5-year increments), I arrive at something like 1/3 of my net capital which is linked to my RP and therefore cannot be used to generate passive income...
Thank you for your opinions.
Sebastian
Hi Sebastian,
My answers:
1) I am of the opinion that "liquid" real estate can be considered in the PF, so it also includes real estate funds and, possibly, crowdfunding. On the other hand, I count my physical real estate assets separately. The "liquidity" split is explained for two reasons: first, obviously, because we cannot manage physical assets more or less actively. But also because we cannot compare apples and pears: the value of liquid assets varies continuously, not that of physical assets. This does not mean that they are safer, just that there is no permanently listed price. So when you say that they "improve the overall return on assets", yes, obviously, since you only consider the return they provide, without taking into account any possible capital loss. On the other hand, you are right, from the perspective of living off your income, you have to take these regular payments into account in relation to your future needs as an annuitant (therefore, to be added to your stock market + incidental income or deducted from your needs).
2) The weight of the RP depends first of all on personal choices. Obviously, in order to become financially independent, the RP must remain as close as possible to the basic needs and capacities of each person. The more expensive the RP is, the less funds are available for anything else. Afterwards, as you did, you have to take everything possible out of the pension systems. Finally, you have to make an arbitrage between debt and amortization. If you amortize little, you have more money available to invest (and it is not very different from margin loans which you say you have not understood everything about). However, I would say that the current era is quite conducive to amortization, at least partially, given the downward trend of the markets (associated with their high valuation), which is simultaneous with an upward trend in interest rates.
Hello Jerome,
Thank you for your message.
To complete your message on the weight of the RP in its net assets and debt vs. amortization. If we start from the assumption of putting all our LPP and 3rd pillar assets to acquisition + every 5 years e.g. to make new withdrawals, this amount that we are therefore forced to immobilize (to recover our pension assets and our 3a payments) contributes to reducing the debt de facto?
On the other hand, as you say, the idea is rather to avoid adding cash during the amortization of its RP which would be used for other investments elsewhere.
For our part, we were obliged to put 5% of the purchase value of the RP in cash because our 3rd pillar assets represented 5% of the purchase value (and we needed at least 10% with the new law limiting equity from the 2nd pillar to 10%).
Yes
absolutely, finally this is where I talk about arbitration to be done… especially at the moment
Thank you Jerome.
To close this topic, and if it is not irrelevant, are you still in debt in % of the value of your RP (with this amortization scheme via the withdrawal of funds from the 2nd/3rd pillar pension plan) and if so to what extent?
For my part, I will reach the famous 35% of amortization (or 65% of debt) in 2-3 years, which is the minimum requirement of the banks.
Then, assuming again LPP, 3a withdrawals, it will only be 50% of the value of my RP in 7-8 years (still without putting in cash, but only with the payment of 3a and LPP funds that can be mobilized every 5 years + assuming that our activity rates of our jobs of my wife and me = those of now; not sure because I plan to reduce my rate by then :)).
Of course these % are established for a value of the RP = that of 2020 (purchase value). If real estate increases or decreases it modulates by the same amount…
So, I tell myself that I don't need to add additional cash to this amortization schedule... but as times change quickly, we'll see if it's necessary.
I still have a third of debt on my RP, which will be amortized in 3 years, when the last tranche is due.
Thank you Jerome,
since you are reaching the end of your debt repayment for your RP, do you know if it is possible to "recover" the cash initially invested when purchasing your RP?
My bank has just refused on the pretext that “this would amount to a form of misappropriation of LPP or 3a assets”.
In my case, fortunately I only put 5% of the purchase value… the rest now being made up only of LPP/3a assets.
Thanks in advance if you have any feedback/opinion on this…
Hi,
I don't understand the point. Why do you want to take out the cash you put in at the start? You might as well not write it off in that case.
Regarding the pension part (LPP / 3a) it is indeed not possible. It is as if you were selling your RP, these assets must return to a blocked account or to your CP, or be reinvested in another RP.
Or, alternatively: become self-employed…;)
Thank you Jerome for your answers.
This message is just to better understand margin loans on the stock market and your message saying that it is not so different from indirect amortization when you own your main residence in Switzerland.
What you did for example on the DBC tracker therefore comes back to what we can do when we get into debt on our real asset (our main residence) and instead of repaying 100% of the remaining capital due, we keep the same level of debt and reinvest our assets elsewhere in order to generate additional returns?
For my part, perhaps wrongly, I think that these margin loans are less risky on physical real estate than on non-stocks/trackers (in any case there is less "volatility" than on the markets... as long as you have of course "bought" your property well (location, price)).
(but it's also because I'm much less knowledgeable about the stock market than you, even if I've made a lot of progress by reading your book and following your posts on the determining PF ;)).
In any case, thank you again for this forum which allows us to discuss these subjects of finance/stock market/financial independence which are not always easy to understand.
Good day
Sebastian
When I say that it is not very different, it is because in both cases you make a basic contribution (a margin of 30% for example on US ETFs or equity of 20% for real estate in Switzerland), which allows you to invest with little means or to keep cash to invest elsewhere.
Physical real estate may indeed seem less risky, because the bank will not make a margin call on you, since the price of the property is not listed. This does not mean, however, that you cannot lose your entire initial contribution, if the price at the time of resale has dropped significantly. It is even possible that you will have to add money. The time frame is therefore different than a margin loan on the stock market, but the mechanisms are still quite similar.
You can invest on margin on long or short positions. The more margin loans you use, the higher your risk. For this reason, I limit this practice only to short positions (for which it is necessary to use margin, since it is a loan – if you want to avoid it, you should use an inverse ETF). In addition, I also limit the assets that I sell short. As a result, the risk on the entire portfolio remains under control. There is sufficient excess liquidity (difference between the net asset value and the maintenance margin requirement).
Thank you very much for your explanations, I understand a little better 😉