Safe Heaven Portfolio Analysis

Safe Heaven Portfolio Analysis

Safe heaven portfolio can be a wise option considering 2019 marks the 11th year to an already-extended bull market which started in in the aftermath of the great financial crisis. It has been a long and very rewarding run for all investors… Especially REIT investors who have continued their long streak of market outperformance. Since we are likely to hit a recession sooner rather than later (1-2 years), tracking a safe heaven portfolio is important.

safe heaven

A safe haven is an investment considered able to retain or increase in value during times of market turbulence. Thus, during such times of distress, investors should look at safe haven assets uncorrelated or negatively correlated to the general market. Specifically, a good portfolio for such markets should comprise:

  1. Commodities: gold, precious metals in general, but also copper, sugar, corn, and livestock are negatively correlated with the market.
  2. Bonds: debt securities are generally sought when markets experience increasing uncertainty.
  3. Defensive stocks: utility, healthcare, consumer staples, etc. 

Why ETFs are a good choice

ETFs provide a convenient way to track some underlying or index when constrained by limited capital. However, not all ETFs are created equal. Cash-based (or physical) ETFs invest directly into the assets, whereas Synthetic ETFs use derivative products such as swaps or access products (like participatory notes). Thus, in order to reduce the sources of risk, only Cash-based or highly collateralized ETFs should be employed. For instance, an ETF on S&P500 can use the put-call parity condition to replicate with options a subset of the index. In such a case, each stock is replicated with a portfolio of derivatives Callstock_x – Putstock_x + ZCstock_x where ZCstock_x is a zero-coupon bond trading at the same price of the stock; as a result, the great majority of the capital is invested in zero-coupon bonds. When volatility is low, options are cheaper and ETFs can be bought relatively for less; however, when volatility increases (i.e., market experiencing turmoil) options increase in value and ETFs become relatively more expensive driving up valuations (note that Net Assets Value include all assets not just collateral) possibly determining a sort of momentum. Such consideration is of paramount importance with respect to commodity ETFs purchased at the beginning of the commodity cycle.

Web Resources

SigFig connects with E*Trade, TradeKing and Vanguard. It allows building an intelligent, tax-efficient, diversified portfolio for a fraction of the cost of traditional advisors.

Portfolio Visualizer, according to their website, provides online portfolio analysis tools for backtesting, Monte Carlo simulation, tactical asset allocation and optimization, and investment analysis tools for exploring factor regressions, correlations, and efficient frontiers.

Morningstar Portfolio Manager gives you the ability to track all of your investments in one place, keep track of price changes, pull in star ratings and other Morningstar data, while giving you insights and research from Morningstar. However, it does not link up your accounts so you have to enter your data manually.

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