Why I am not changing my portfolio even though the yield curve has inverted

On Friday it was reported that the yield curve in the US inverted for the first time since the last (great) recession. This is supposed to be a reliable harbinger for a future recession in 12-18 months.

What does it mean when the yield curve inverts?

It means the US short-term interest rate (as measured by the 3 month Treasury Bill rate) is now higher than the long-term interest rate (as measured by the 10 year Treasury Bill rate). An inversion like this is generally regard as a negative market/economic sentiment that can affect economic and market behaviour.

The yield curve inversion has sent some scurrying to make changes to their portfolios by raising cash, selling riskier stocks and becoming more defensive (buying utilities, telcos, REITS and consumer staples equities).

Why I am not scurrying to do anything on the news:

  1. I already have some cash (about 10% of my portfolio, including high-interest savings and short-duration bonds maturing later this year)
  2. I already have good exposure to defensive equities: ~18% utilities + ~11% consumer defensive + ~6.5% communications services + ~3.5% real estate = ~39.0% defensive
  3. I have less than 50% of our total portfolio in equities so a market downturn should be offset somewhat by non-correlated holdings in fixed income, cash and bullion (this was true in 2018, when my portfolio returned ~+1% in spite of equity drawdowns in Canada and the US)
  4. If I sell something to raise cash there could be tax consequences in our non-registered accounts, due to potential capital gains being taxed
  5. I don’t know which non-defensive equities to sell to raise cash – I like all my holdings for the long haul or I wouldn’t own them
  6. Recessions tend to be short and I believe my long-term portfolio is structured well for riding out short-term events
  7. An inverted yield curve has reportedly accurately predicted upcoming recessions eight times (by some sources) since 1968 but, if on January 1, 1968, I bought and held the S&P 500 (^SPX) I would have made a return of 2.81K% in spite of the eight recessions (including the Great Recession of 2008-09)
  8. According to Forbes, the chance of a recession in the next year is always about 27% (based on their data pointing to 16 recessions since 1960) and today the chance is 30%, hardly more than average
  9. If the chance of recession is 30% next year there is also a 70% chance there won’t be a recession next year which means, based on probabilities alone, I should be buying risk-on stocks
  10. If the US Fed surprises by lowering interest rates, that could change the situation immediately
  11. I don’t know how to time when to start re-buying the risk-on equities I am supposed to sell now – presumably when the yield curve corrects to non-inversion

I am not saying a recession won’t happen in 2019-20. It may well.

What I am saying, as a long-term investor who buys, holds and monitors a portfolio of retirement assets designed for all markets, who relies primarily on asset allocation rules when making security weighting decisions, and who makes limited and selective trades intended to improve overall portfolio quality, I don’t react to news like this.

Do you?

 

 

 

The updated OSC fantasy growth and income portfolio 2018 performance deck is posted

The deck on the 2018 performance of the two OSC fantasy portfolios that was presented on March 12, 2019 is now posted.

The deck has a slide at the end about how much difference 10 weeks can make in the markets.

There was a typo on the 2016 fantasy income portfolio returns that has been corrected as well.

See the deck here along with other member content from the Ottawa Share Club.

OSC fantasy growth and income portfolio 2018 performance deck is posted

The deck on the 2018 performance of the two OSC fantasy portfolios that was to be presented on February 12, 2019 is now posted. The deck may be presented at a future meeting since the February 12 meeting was cancelled due to bad weather.

The deck has a slide at the end about how much difference six weeks can make in the markets.

See the deck here along with other member content from the Ottawa Share Club.

Annual performance for my secular trends fantasy portfolio is now posted

I’ve posted the annual performance review for my secular trends fantasy portfolio which consists of nine ETFs representing thematic investment opportunities.

2018 was not kind to the portfolio (down around 10%) but cyber-security was a particular bright spot, up about 7%. More here.

My annual portfolio review and updated household investment plan are now posted

I’ve posted my annual portfolio review as well as an updated version of my household investment plan.

My annual review shows a small gain in our portfolio for 2018, well ahead of major North American indexes. More here.

The updates to my household investment plan feature continued focus on sequence of returns risk and asset allocations based on “buckets” along with a reduction in our target portfolio performance going forward as we start to glide into retirement. More here.

The December 31, 2018 year-end reports for the OSC fantasy growth and income portfolios are posted

Here are the December 2018 Ottawa Share Club fantasy growth and income portfolio reports: