Weekend reading: Many shall be restored that now are fallen and many shall fall that now are in honour

What, Horace used American spelling! Is this Horace Simpson?

Be diversified geographically, and go passive I’ve firmly “bought” into (pun and no pun intended). Where I still remain ignorant/unconvinced (the latter may be due to the former) is the case for government bonds in diversification. I won’t buy into them, being so highly priced with low yield in recent years. And the usual case for them: prices have historically moved inversely to share prices, might not be the same in the future. There’s the interest rate issue too. I can nonetheless accept the historic answer of water in your whisky. But not convinced yet that holding deflating cash instead of bonds is not a reasonable risk diversification approach. Am very open to an explanation why my approach of cash instead of bonds as diversification is flawed.

@TI. I knew he was Italian :). Just back off holiday so feeling chirpy. The FirevLondon link cheered me up. I though I over complicated things but he/ she sets a new standard.
@Tony. Someone famous ( could even be Italian) said that you are not diversified unless you hold stuff you would rather not own. There are scenarios were bonds would gain relative to cash so you are effectively discounting those. Bond prices haven’t moved markedly downwards so others are buying. What do you know that those buyers don’t?
Actually I have the same bias and am holding far too much cash but what is invested is 40% bonds and I’ll keep it that way if I invest more.

I like John Kingham’s FTSE100 and 250 valuations. I realise it is short-sighted to look at just dividends rather than total return, and in some periods the 250 kicks the 100 so badly in total return that the excess in dividend yield is a very poor compensation.
But looking at the next 10 years its interesting that the 250 is only half a percent pa ahead on those projections. My natural yield portfolio would favour the FTSE100, indeed it already does, with most of the FTSE250 company exposure coming from IUKD at present.

My target to load up on the FTSE250 (by buying VMID probably) is if the yield rises to 3.5%, which would point to valuations being low enough to cushion any downside. But this doesn’t seem to occur all that often. It would probably need a global bear market, Labour government, or catastrophic worst case Brexit scenario to occur.
Fully aware that natural yield portfolio construction should not be driven purely by “yield greed”, the portfolio as a whole should have enough capital growth to keep up with inflation otherwise the overall income it gives will not keep up either. Which is why I do want to add some FTSE250 exposure when the price is next right and I’m not already up to my allocation limit on equities.

You read Guyliner Monevator? Are you a secret Guardian Blind dates fan?

I thought the headline was a reference to recent political events…

@mathmo – there is a sort of pseudo anonymisation of credit and money dashboard data. I (or the companies I work for) buy the income and debts against cookies which I can then combine with your personal data (matching cookies to email addresses you put in for surveys or newsletters or samples etc to come up with “tribes” which are then used to buy digital adverts

@Simon T — I’m guessing at some point the New York Times does a similar article to the recent one on pseudo-anonymised phone location data (where they found the home addresses of cell phones that frequently visited the White House — where they spent the night most often as well as places where they spent the night occasionally). I assume it’s reasonably trivial to cross-reference subscribers to Married High Court Judge Monthly with those who pay for Tinder Premium and go fishing. I don’t think it’s well understood how poorly this area of data is regulated either by law or by player ethics and there’s the inevitable expose in the post.

Great article, again. With US looking like it could be overvalued and emerging like could be undervalued, from that chart above. What would recommend as a low cost emerging market passive fund?

EM ? Some ideas here.
https://monevator.com/low-cost-index-trackers/

Just been looking at EM trackers. They fall into two camps depending on whether the index includes South Korea or not. One variety has more than 30% in China. Given the coupling of the Chinese economy with the rest of the world it isn’t clear to me that this is buying much in the way of diversity, perhaps, by leveraging up on China, even the opposite. I suppose this may be a reason to look at EM smaller companies as posted by someone earlier.

Remind me again why everyone’s suddenly so keen on overweighting EM?

The Simple Dollar post on choice of success is so well written, counters with full force the reasons why the choice of a more outwardly affluent lifestyle is so attractive, yet not aligned with what one may value. Probably the first weekend link I have re-read.

I dropped my EM small cap recently as it slipped below 4% of my portfolio’s risk adjusted target allocation, merging it into my EM large cap allocation, for which I use VFEM and Fidelity Index EM in different accounts.

Ultimately, I’ll probably drop the Tim Hale over-weighting global philosophy and just go for a FTSE All World tracker and let someone else work out the cap-weighted allocations.

As for bonds, liquidity is the key, but I guess it wouldn’t hurt to take some pain out by allocating some fixed income to fixed term retail bonds, although these tend to be lower interest rates within ISAs than without

Thanks, @TI – the clever persons at RCM refer to this Artemis fund that has about 25% each in “domestic equity” (presume USA) and “long volatility” . They then confuse me further with talk of “Discretionary Global Macro”.

You are right: they must be paid extra to obfuscate.

Does anyone know a website that translates this clever-person-speak into English?

@ChrisF – if you mean Discretionary Global Macro, I’ll try.

Macro means they’re awfully clever at Excel.
Global means just that, they pick nice sounding places they’d like to go on holibobs to and invest there. So the fund can pick up the tab. It’s research, see?
Discretionary means that if they don’t like what their Excel spits out, they can change their minds. After a long lunch.

I think that just about covers it.

Ah! I think that’s to do with String Theory. As in how long is a piece of…

Long volatility is an investment strategy where, in simple terms, the fund buys option structures that give them a profile which is long gamma (the 2nd derivative of the option value with respect to the underlying asset price) and long vega (1st derivative of the option value with respect to the implied volatility of the asset price). Buying these options costs premium and as a result they are short theta (the 1st derivative of the option value to the passage of time) or time decay.

In most asset classes, you earn yield/carry/income from the asset. Your vulnerability is that these assets rise slowly and fall rapidly; you are to some degree ‘short volatility’. Explicit short option volatility strategies (selling options) actually generate quite good Sharpe ratios as a passive approach, albeit the path dependence of your short positions leaves you very vulnerable to shocks. You have to be careful with leverage levels. Many who try it eventually blow themselves up.

In contrast, the long volatility strategy can benefit from rapid moves in either direction. In the absensce of sufficiently sized moves in the asset prices, however, the options will decay in value. In that sense it is short yield/carry/income. The long volatility strategy will not ever blow up but could instead bleed to death.

The reality is that the implied level of volatility (the level implied by the option price) is typically higher than the delivered/realized volatility in the market. Options mitigate risk and mitigating risk doesn’t come cheap. Moreover, high levels of volatility tend to manifest themselves more in bearish markets than bullish markets, which means that long volatility strategies tend to outperform when markets fall. As a result a pure long volatility strategy is often not really a good idea as a passive approach. It can only really work well as an active strategy as it requires skill (buying volatility when it is cheap) and good timing (to mitigate time decay).

Long volatility strategies are gaining some prominence at this time because both implied and realized levels of volatility are at the same lows (or lower) than that observed in the run up to 2008. Some of this is caused by the same behaviour that caused 2008 with funds selling options and other forms of insurance to earn income (yield grab). Some of this is caused as a by product of changes in investment approach; ETF investing, for example, tends to reduce typical day-to-day volatility at the expense of creating “digital volatility” in liquidity air-pockets. Underlying everything, however, is financial represssion from central banks, who now act quickly to suppress market falls and thus volatility (the Fed put).

I have no idea what ZX is talking about, but

> My understanding was being long meant you gain if the asset goes up, lose if it falls.

Yes.

> If I just hold long stuff, I am exposed to the volatility of the assets so am I not long volatility

No, you are long the asset price, but not long volatility. You won’t profit if it goes down, and you won’t lose money if it stays the same.

For example you could be long volatility by buying an option to buy the asset at 10% above the current price and an option to sell the asset at 10% below the current price. If the asset price doesn’t go up or down 10% the option expires worthless. If the asset goes up or down more than 10% plus the cost of your options you start making money.

If the market is volatile then options will be expensive, if it is stable then options will be cheaper. You want to buy options when they are cheap and then sell them when they are high.

Thanks to all who have shared their knowledge on long volatility. Who knew it could be so complex…
Can I return to the original link, and the idea of a 100-year portfolio? The original post, and the discussion here, has led us down a fascinating rabbit-hole (worm-hole?) but surely there is a useful discussion (perhaps a post, @TI?) to be had about really long-term investing, hopefully leaving aside the stuff you need two maths PhDs and a private bank to cope with.
Charities, trusts, even some families all have horizons beyond the ‘invest while I work, spend when I retire, die broke’ timescale of the FIRE set.
So, team, how does one devise an eternity portfolio? Or one for a century, if eternity is a bit much?

@Chrisf, I just read the 100 year portfolio link and my answer has to be buy a world tracker fund, or funds if you want to mitigate some of the fund manager risk. Over 100 years the charges from the likes of Artemis will heavily eat into returns. Even if Artemis do outperform over some periods, the chances of them keeping up with the market over 100 years are miniscule.

Fascinating discussion here. The Artemis piece is well worth reading. The key problem is, how diversify from stocks when bonds have such a poor expected return, and correlations may flip. I got as far as TIPS, precious metals, and too much cash for lack of alternatives.

I’d be interested how long volatility or commodity trend are accessible to non-professionals.

From its peek in 2012 the Artemis Vega fund has lost about 19% of its investors money. The ProShares VIX Short-Term Futures ETF (VIXY) has lost 97% of its value over the last 5 years.

If you look at etfdb.com you will find that the only commodity ETFs to make any money over the last 5 years are those based on precious metals or inverse ETFs, which are based on the shorting of commodity futures.

A difficulty with commodities is that storage costs are very expensive, although precious metals are not too bad. To avoid storage costs you have to use futures instead, but all commodity futures suffer from contango most of the time, so long term rolling over of futures contracts will drag returns compared with movements in the spot price (and that is before the trading costs). Pure volatility plays, such as with VIXY also rely on VIX futures, which again suffer from contango. Contango is the primary reason for the very poor performance of long VIX ETFs.

In short, expected returns from long commodities and long volatility are negative. The only way to make money over the long term is to employ traders who are a lot smarter than the other traders. Good luck with that.

A case may be made for investment in precious metals, as there is a long track record of demand, but precious metals are not really income producing assets, unlike bonds and shares, so future value depends solely on what someone is prepared to pay. A good option for UK private investors may be gold sovereigns and Britannias as these can be traded free of CGT and VAT.

The other main income producing assets are land, property and infrastructure. To get exposure to these assets most private investors will need to invest in the shares of companies holding the assets, rather than directly in the assets themselves, except in the case of their own home, BTLs and perhaps solar panels. Investing in companies brings in management costs and risks (and usually leverage), but those risks can be mitigated through diversification. We have high exposure to UK property, so my only investment here is in a US REITs ETF.

My preference is to hold income producing assets at low cost and with as little trading as possible. The less money handed to middlemen the better.

If you don’t like the volatility of a portfolio of income producing assets (and possibly PMs), hold cash. Cash deposits have zero volatility and close to zero correlation with other asset classes. Cash may lose money in real terms, but nothing like as much as investing in commodities or long volatility is likely to.

Funny isn’t it, after almost four years of bleating about leaving the Eu, waiting for a ‘deep & immediate’ recession that never happened, and the markets have been hit by something no one saw coming.

Still, gives you something real about rather than worrying about planes will still be able to fly after the transition period ends