The Logical-Invest newsletter for February 2019

Our top 3 strategies this past month:

Leveraged Universal Investment strategy with +7.5% return.
Maximum Yield strategy at +4.3%
U.S. Sector strategy (free to subscribe) at +3.1%

News:

Alex’s new post describes the process of blending Portfolios (rather than Strategies or ETFs) using the Portfolio Builder.

Bouncing into 2019

Three fundamental trends to watch as 2019 unfolds:

The first trend includes the reversal of QE in the U.S, the end of the asset purchase program of the ECB and the decrease of liquidity of most other major central banks. Less money is being pumped into world markets as policy makers keep an eye on employment numbers and economic growth. If the economy continues growing and wages rise, central banks will be ready to raise rates and normalize what has been an extremely low rate environment. From then on they can adjust as usual if and when inflation shows up. On the other hand, if markets show weakness, policy makers can step in and ease expectations of rate increases. This is what happened on January 30th as the Fed stated it would take a “patient” wait-and-see approach to further rate hikes in light of recent market “volatility”. We assume “volatility” refers to the recent SP500 -20% end of year drop.

An implication of this brings us to the second trend: Emerging markets vs the U.S. The Fed was first to tighten policy and raise interest rates. This created an imbalance and money rushed from other risk assets and currencies into dollars. In other words, an institutional investor could sell his foreign currency, stock and bonds, buy U.S. short term debt and get almost 2%, risk free.  These flows benefited the U.S. market in 2017 and 2018. This trend may reverse as U.S rates stabilise and foreign rates start moving up from the rock bottom they currently are. This may or may not happen this year but the reversal of flows will have a significant impact. If we do not enter a recession and global economic growth continues, we should be looking for a weakening dollar, rising foreign interest rates and emerging markets bouncing back to out-performance.

The third trend is a political one: Against the trend of globalisation of policies, taxes and culture comes a political trend of nationalism and separatism. This is nowhere more obvious than in the European Union were Britain wants back it’s identity and economy (but can’t seem to get it), France’s middle class is revolting against excess taxes, the ‘South’ (Greece, Italy, Spain) cannot get along with the North (and vice-versa) and even Germans seem to be worse off despite their country’s tremendous surplus. In a similar but distinct vein, the U.S. has sparked trade re-negotiations with both allies and foes, including the E.U., Canada, Mexico and of course China. Such political trends may result in uni-lateral decisions that may continue to cause trade wars, tariffs, currency imbalances and other disruptions to the markets.

Coming back to the actual markets, the year started with a bounce. The SP500 is up 8%, Emerging markets +10.3%, Junk Bonds +5.2%, foreign Bonds (PCY) +4.7% and Gold +2.9%. The U.S. dollar index stayed flat (-0.2%) while Treasuries came in slightly positive at +0.4%. Some world indices brought double digit returns including Brazil, South Africa, Canada and China.

Our strategies were all positive for the month. Top spots were for the Leveraged Universal Investment strategy at +7.5%, our Maximum Yield strategy at +4.3% , the U.S. Sector strategy (free to subscribe) at +3.1%, the Enhanced Permanent Portfolio at +2.9%. The Nasdaq 100 strategy returned a solid +3% for the month, continuing it’s positive path from 2018. Despite this January surge in most assets, our strategies are still in defensive mode placing substantial allocations to safe-heaven assets, via our HEDGE strategy.

We wish you a happy new year and a prosperous 2019, and look forward to a vivid discussion.

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6 thoughts on “The Logical-Invest newsletter for February 2019”

  1. I miss seeing the color coded monthly matrix with all of the strategies and portfolios listed and ranked by YTD, 1mo, 3mo, 1 yr, vol etc. The dashboard has the top strategies and portfolios but it was a nice visual to see all at once in a matrix. Is it still available?

  2. Another thing I really miss was the snapshot you used to provide that showed a correlation matrix so you could see which strategies and benchmarks had the highest correlations and which had the lowest correlations.

    • Hello David,

      I also miss it, have the correlation matrix on my todo list, but some other things with a higher prio, may take some weeks.

  3. Forgive me, I am new to managing my own retirement portfolio and the answer to this question may seem obvious to a more experienced user. I see that leveraged (3x) ETFs are used as part of the Aggressive Core Portfolio allocation. I thought that leveraged ETFs suffer from decay when held for more than one day. If that is indeed true why would the portfolio recommendation have us buy and hold them for a month (or more)?

    • Hello Devin,

      yes and no, and it depends, but I’m no lawyer :-)

      In simple terms: When the market is in an uptrend with a stable volatility regime, actually performance of leveraged ETF mathematically benefits from the way they are constructed. But when the market turns down and volatility is high then the decay indeed amplifies losses more than the leverage. So the trick, as simple and naive as it sounds, is to invest into leveraged instruments only in a lasting uptrend, then the odds are mathematically on your side. That’s what we intent to do with our momentum strategies.

      Our buddy TrendXplorer just wrote about another nice strategy where he explains more in depth, see here: https://indexswingtrader.blogspot.com/2018/12/exploring-smart-leverage-daa-on-steroids.html

      Another question obviously is whether you should put your nest eggs into an aggressive portfolio, this depends on your age and discipline to stick to it even in troubled waters.

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