Portfolio Shield – February 2022

Portfolio Shield remains hedged for January. I am pleased to report the Simplify funds reduced some of the downside risks in the equity market. However, the long-term bond hedge remains a slight drag on returns.

Several of you have expressed a valid concern about the ability of the hedging mechanism to hedge risk because it hasn’t hedged any of the recent downside moves in the equity markets. Today, I’d like to address your concerns.

There are several ways to hedge a portfolio, and several types of hedges. Some hedges are better than others. Long-term Treasury bonds remain the best way to hedge risk given the design of our monetary system, and the mechanical design of many investment strategies.

Generally speaking, most portfolio hedges are reactionary. Reactionary hedges do not kick in until after a portfolio has experienced significant drawdowns due to a rise in volatility. Few portfolio hedges are designed to anticipate volatile, or Bear markets, and hedge in advance. Portfolio Shield was specifically designed to do just that.

When a portfolio hedges in advance, there are times it will be early or incorrect. Occasionally, Portfolio Shield’s decision to hedge has been incorrect, but those times have been infrequent. There are times when it is early, such as it is now. This can produce a drag on returns in the short term.

It hedged before the December 2018 flash crash, and again just before the March 2020 pandemic crash. In both instances, Portfolio Shield successfully reduced the drawdown, while reactionary strategies took a big hit.

More than six months before the Great Financial Crisis, it hedged. This produced a drag on returns until the market melted down. Fortunately, it turned out to be a prudent move.

Portfolio Shield is a long-term investment strategy. It’s not 100 percent infallible, but no strategy is. It’s not designed to time, or react to market events. Rather, it is designed to anticipate them as well as possible. Being early to a major risk-off event often means returns will be slightly below expectations for several months, or more.

I consider investor expectations and concerns to be of critical importance. That is why I want to make certain you know and understand Portfolio Shield is a long-term investment strategy that attempts to anticipate risk-off moves by hedging early. The flip side is there will be times its decision to hedge will be a drag on returns. While those times will be infrequent, it will be incorrect in its decision to hedge.

I hope you have found this information helpful, and that my expectations as the inventor, and your expectations as the investor, remain in line.

Due to recent equity volatility, Portfolio Shield™ increased its long-term bond hedge (TYA) for January. Portfolio Shield™ was designed to increase its hedge during periods of heightened volatility, so it is working within its design parameters. TYA is now 39% of the equity allocation across all models.

The worst of the decline in bond prices is likely behind us and I expect the hedge and bond-heavier portfolios to perform much better over the next several months or longer as periods of high inflation are usually followed by lower interest rates and higher bond prices.

Historically, periods of high inflation are also usually followed by a recession. I am pleased to see Portfolio Shield™ remains hedged against the high probability of a recession.

As a reminder, all strategies are rebalanced on the first trading day of each month and at that time, any new monies are invested according to the model strategy you are in.

For those who want to change between strategies, changes will occur at the next rebalance on the first trading day of each month.

There is only a 0.3% allocation to cash in each model. Due to a misreporting between Morningstar® and the ETF providers, the Asset Allocation box on the fact sheets may show a higher cash position than is actually in the model.

If you have any questions or would like to change which Portfolio Shield™ strategy you are invested in, please let me know.

Linked below are the latest Morningstar® Investment Detail Reports for the Portfolio Shield™ family.

Thank you,

Steven Van Metre, CFP®