It is January 1st 2022, 2.06 PM. I have been thinking about life, money making and portfolio returns. In 2021 my portfolio did quite well. However, although I committed to 70% Equities and 30% Gold portfolio, I changed the portfolio to 60% equities and 40% Gold.
My Current RSP Investment Portfolio is as follows:
45% SP500 Fund (Hedged)
14% MSCI United Kingdom (Unhedged)
41% Gold
My Decision Thought Process:
Initially my portfolio was composed of 70% SP500 and 30% Gold based on the research I conducted in the previous article. However, I started to become increasingly uncomfortable in 2021 with SP500 valuation and reduced exposure to SP500 by buying the UK index and increasing the position in Gold.
The issue, once again, is that I am starting to become undisciplined with my portfolio decisions, which leads to more widely distributed outcomes. One positive note is that I have been able to avoid cash holdings, which helped me to avoid inflationary destruction.
- SP500 is trading at an extreme level of Shiller PE (as of January 1st 2022 the PE multiple stands at 39.98)
- Since I changed the allocation (3-4 moths ago), SP500 increased in value even further. MSCI UK and Gold remained relatively stable
- This is once again a confirmation that I cannot predict short-term return fluctuations. For some reason I still resist this idea even though I have been investing for 16 years. There is absolutely no way I can predict a return on a particular security or index.
- SP500 is trading at 39.98 Shiller PE and 30 Forward PE. Whereas the median Shiller PE is 16 is and median forward PE is 14.87
- SP500 Earnings yield is 3.33% with a median of 6.72%.
- However, the current 10 year bond yield is 1.43% and in the US it is 1.51%
- Inflation in Canada is 4.4% and in the United States is 6.8%
- SP Returned 27.89% in 2021 and EWU (MSCI UK) Returned 18.22%.
- Gold Returned -4.15%
- My Portfolio, with all the rebalancing and other decision returned 14.56%. Given the fact that I was invested approx. 35% in Gold and 65% in equities my expected return with no rebalancing could have been 16.67%, which is not too far off. Although I did loose 2% somewhere in the process, likely because I invested some money in MSCI UK.
2. Does 60/40 Allocation vs. 70/30 allocation matter?
No, not significantly if allocation is kept constant and is rebalanced once a year. This is consistent across time periods (i.e. 50 years vs. 10 years)
Portfolio 1: 70 Equities / 30 Gold
Portfolio 2: 60 Equities / 40 Gold
Return: no significant difference
Risk: no significant difference
Decision: GO BACK TO 70/30 as per ORIGINAL ALLOCATION FOR LONG-TERM STRATEGIC ASSET ALLOCATION. DO NOT TRY TO TIME THE MARKET
3. Should I continue using Shiller PE be used to reduce risk vs. Regular Balanced Portfolio (60/40)
I don’t have all the data on this subject to make a perfect decision, but I think a relatively good decision can be made. For example, I don’t have data in terms of how Shiller PE will work with Gold Timing (only Bond Timing). However, a balanced portfolio of 70 Equities / 30 Gold vs. 70 Equities /30 Bonds has performed relatively the same.
- Drawdown: THE DIFFERENCE IN DRAWDOWN BETWEEN BALANCED PORTFOLIO AND CASE SCHILLER STRATEGY IS APPROX 5-10% BASED ON THE TIME PERIOD
- Portfolio Size: My RSP Portfolio is STILL RELATIVELY SMALL and AFTER TAX IMPACT OF 10% DRAWDOWN is nill
- Return is approximately the same for Shiller PE Rebalancing Strategy vs. Balanced Portfolio Strategy
- Paying attention to Shiller PE on SP500 maybe too time consuming/difficult
What if we invested using Shiller PE Strategy when Shiller PE was at the highest level in 2000?
- In 2000, Shiller PE was at its peak at about 44
- If we invested in just equities, our performance would have been just 1.2% over the next 10 years
- Second best would be a balanced 60/40 portfolio with 4.37% return
- And the winner would be Shiller PE strategy.
- However, Balanced portfolio return is not significantly lower than Shiller PE Strategy. However, drawdown is approx. 10% higher.
Decision: DO NOT USE SHILLER PE FOR SP500 STRATEGY FOR SP500 PORTFOLIOS – IT IS NOT WORTH THE TIME and EFFORT, and DOES NOT IMPROVE LONG-TERM RETURN. GO BACK TO 70/30 ALLOCATION and REBALANCE in 2023. U
4. Should I diversify to other markets with more conservative Shiller PE Ratios?
There is an inverse correlation between Shiller PE and Stock market return for the next 10 years. Data above confirms the observation (i.e. we invested in a US Stock market when Shiller PE was at about 44, and the 10 year annualized materialized at 1.2% per year) with the current Shiller PE of about 40 we are reaching those levels again. The question is, should we invest a percentage of our portfolio in markets where Shiller PE is lower than SP?
Note: I am only considering this at the extreme Shiller PE level
- Diversification into international markets may be beneficial from equity perspective
- Still passive approach if invested in an index
- Diversify Canadian Currency/Inflation Risk
- Currencies must be stable (not emerging markets)
- Invest in international markets equally (i.e. if 4 markets, invest 25% each). Current Shiller PE for Hong Kong and UK is approx. 15 giving us a better chance of future returns.
Note: Lynn Alden / Siblis Research
DECISION: ALLOCATE 15% of the PORTFOLIO TO PASSIVE LOWER PE MARKETS (HONG KONG AND UK) to (1) Increase the probability of future returns (2) Diversify internationally (3) While Maintaining Passive exposure
2022 Portfolio FINAL
SP500: 46% Hong Kong: 7% United Kingdom: 7% Gold: 30%
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