Portfolio Return To Risk Chart. Far more information.
By showing risk in addition to return a great deal more is revealed.
The left hand vertical line represents return, while the horizontal line represents the standard deviation of daily returns.
The green dot shows both return AND risk of a portfolio, and a range of benchmarks are represented in the colored squares.
Investors can then seek to align themselves with the best practices of the most successful investors for the best chance of optimal performance. So the focus is more on risk than return and in particular on the ratio of Return to Risk.
The chart shows:
- The portfolio has far less risk than US equities.
- The portfolio has alpha of over 2%. In other words the portfolio is above the return to risk line drawn between the blue square and the red square.
I believe when a portfolio return lies above the return to risk line that this is the clearest sign of optimal performance, as discussed in my previous notes.
I predicted an interest turn on November 1st, Time stamped
This now looks to have happened.
The chart above shows that 5 year Treasury yields may once again have peaked at a lower high, as rising interest rates have preceded a significant reversal in the S&P 500.
As the probability of a cyclical downturn in the US economy in Q4 became very significant I took a risk averse stance in advance, as time stamped in my Q3 2018 review.
At the end of Q3 I could not have been any clearer about the risks and challenges being unprecedented as we entered Q4.
Here is my summary written at that time:
“Summary and Mindset polarization
In my opinion declining global growth and tightening policy is typically a hostile investment environment.
In 2018 so far most of the world’s equity investment benchmarks are down year to date in dollar terms. Bonds, commodities, precious metals, international equities, are broadly negative. The outlier is US equities, with outstanding circumstances in debt growth and buybacks the main feature.
US markets are reflecting multiple historical extremes, most significantly in positioning.
Retail investors have never been more committed to passive investing with an extreme bias in favor of US equities relative to bonds and precious metals.
Seasoned Cycle investors and “commercial” futures investors with the best long term track records are broadly expressing the polar opposite position.
Fundamentally, the difference is in mindset, and then the investment process that flows from that.
At a time of such polarization, investors need to evaluate their own mindset.”
The last statement in that summary above is what I believe the key to understanding what happened in Q4 2018. I have grown convinced after 34 years of analysis, trading and investing that most investors are confused about how to go about investing and are unprepared for changing circumstances.
This is why I spent so much time this summer writing a series of articles about developing a well grounded investment process that will help to enable investors to transform their approach towards the best practices of the most successful investors of recent decades.
Investment Mindset Bootcamp
I believe that unless you have thought deeply about these points and done the necessary research and follow up work, it is likely that you are investing sub-optimally. Here are the 5 articles.
I will be giving a seminar on this at the Tower club on Saturday January 12th 2019
Redefining Investment Management. Executing Transformation.
Chris Belchamber Investment Management and Chris Belchamber offer Investment advice through Belpointe Asset Management, LLC, 125 Greenwich Avenue, Greenwich, CT 06830 (“Belpointe”). Belpointe is an investment adviser registered with the Securities and Exchange Commission (“SEC”). Registration with the SEC should not be construed to imply that the SEC has approved or endorsed qualifications or the services Belpointe offers, or that or its personnel possess a particular level of skill, expertise or training. Important information and disclosures related to Belpointe are available at http://www.belpointe.com. Additional information pertaining to Chris Belchamber and/or Belpointe’s registration status, its business operations, services and fees and its current written disclosure statement is available on the SEC’s Investment Adviser public website at https://www.adviserinfo.sec.gov/.
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