Everyday Portfolio Update for December, 2011

Portfolio Returns for December, 2011

The Everyday Portfolio selects up to 11 assets from a diversified basket of asset classes on the final trading day of each month. Below is the new allocation for the month of November as well as the performance numbers from October.  Click to read more about the Everyday Portfolio strategy here.

Optimal Portfolio Return: -0.85%

S&P 500 Return: 1.04%

The Everyday Portfolio underperformed the S&P 500 this month due to its heavy allocation in gold, which saw a significant drop of almost 11%. Without the position in gold the portfolio would have had a positive return.

*Note: Optimal returns mean no trade friction and no trade commission. In a real world results will be slightly higher or lower due to slippage. Please see our portfolio at covestor.com.

January 2012 Portfolio Allocation

For the month of January, the model is increasing equity exposure to leading asset classes including large cap US, small cap US, real estate and the favorite emerging market of Malaysia. We are also removing exposure to Gold and lowering exposure to long term treasuries which in recent months have seen more significant volatility.

 

Commentary

2011 proved to be a difficult year for many managers and strategies.  The Everyday Portfolio held up throughout all the difficulty and volatility in the market. I am pleased with its performance.  The goal of the portfolio is to sidestep volatile environments like what we saw in the late Summer of 2011, while also participating in the market when volatility is lower like during the first half of 2011.

The Everyday Portfolio enjoyed strong returns in the first half of 2011, participating in the overall market rally.  In early summer the portfolio reacted to the overall market and begin to trade out of equities in favor of less volatile bonds.  A large position in the US long term treasury bond paid off and allowed the portfolio to offset any loss from equity positions.  In fact the Everyday Portfolio even had a positive return for August.

In October, the portfolio was 100% out of equities and in bonds.  That made for an interesting month as the overall market had its largest single month gain on record of 11%.

The remainder of the year was a highly volatile back and forth in which the Everyday Portfolio held its own. However, this back and forth action is bad for the portfolio strategy as it causes whipsaws in and out of equities.  Let’s hope this back and forth doesn’t last much longer.

Moving into 2012 the strategy remains the same for the Everyday Portfolio.  We will continue to utilize the benefits of diversification through uncorrelated assets in our portfolio. We will focus on only those assets in up-trends and we will weight the portfolio more towards those assets showing lower volatility. In other words we are making no changes for the portfolio strategy this year.

However, from a purely mechanical aspect we are going to make a minor change to our system.  Instead of re-balancing at the end of the last trading day of the month we are going to rebalance at the end of the first trading day of the next month.  This means we will use the weightings determined at the end of the last day of the month to rebalance the portfolio at the end of the day on the first day of the next month. This avoids late day volatility associated with the last day of a trading month, and allows for a more consistent and timely rebalance.

Going into 2012 the Everyday Portfolio’s bias is towards starting to increase exposure to equities.  The portfolio is starting to add exposure to real estate and small cap US assets in addition to leading emerging markets. It is also reducing exposure to long term US treasury bonds due to the bonds high volatility. What is surprising is that all of these moves (increasing exposure to equities, reducing exposure to bonds) goes against the mass financial media which is focused on the Europe Debt Crisis and the ever increasing US debt.

The portfolio is adding real estate this month because the real estate index (VEA) has seen a substantial three month return (nearly 13.5%) while also having a strong 20 day return (5%) suggesting that while the overall market was digesting the gains of October real estate assets were actually going up.  In addition, the real estate index has demonstrated a lower 3 month volatility than most equity assets making it even more enticing for the next few months.

If you’re tired of volatile returns with your passive “buy and hold” portfolio, join us at COVESTOR where we trade the Everyday Portfolio live and you can follow along!

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