Determinant portfolio: situation as of 01.02.2023

At the beginning of 2023, we experienced a magnificent example of the "January effect". Investors tend to be more optimistic during the last days of the year and this euphoria generally continues in January, leading to an increase in investments in stocks.

The "January effect" is obviously not guaranteed every year and can vary depending on financial and economic conditions, as well as global events. But, at the beginning of 2023, with better than expected figures published in the USA, particularly in terms of employment, unemployment and inflation, we had the necessary ingredients for a nice stock market rise.

Markets and the portfolio

Thus, the Swiss Performance Index has experienced very strong profitability over the last month, with 5.5%, just like the S&P 500 in CHF. determining portfolio had to be content with an increase of 2.3%, which is quite appreciable over such a short period, especially since the target net share of shares was only 50%.

One of the characteristics of tactical asset allocation is to follow trends. The advantage, in the medium and long term, is to be able to maximize performance while reducing risks. However, in the shorter term, these trends sometimes reverse, as was the case during this month of January. When this happens, and in particular during a bullish reversal, this strategy cannot compete with a buy & hold approach. This is the price to pay for sleeping soundly the rest of the time (if the market had continued on its bearish trend of last year, we would have been relieved to have gotten out covered).

I am constantly comparing the results from the theoretical portfolio models, to those of reality and my backtests. When elements do not satisfy me, or if they do, but I think they could still be better, I look for solutions to make them improve. It is of course impossible to completely avoid being caught against the market, unless you replicate it perfectly. However, I have a few ideas to make these sudden changes in trend less penalizing for the portfolio in the future. If some of them still require time to prepare, one is particularly successful. I have been talking to you about it for several months...

Active still in testing phase

The new asset I have been telling you about for september would have indeed made it possible to offset, at least in part, the penalizing effect of the tactical allocation compared to the market reversal. Above all, this could have been done while reducing the overall risk of the portfolio (unlike a simple increase in the share of buy-and-hold stocks, which would have had the same effect, but by increasing volatility).

Unfortunately, I still need to do some real-world testing, as its implementation is more complicated than for the other assets in the portfolio. So I will have to postpone its introduction once again. In the meantime, it continues to appear in the portfolio as "Asset under test", just before reserves and cash.