Portfolio Shield – May 2022

Last month I mentioned I felt Portfolio Shield™ was likely to reimplement its hedge within the next three months. By an overwhelming majority of the underlying signals in the formula, Portfolio Shield™ has decided to hedge again for May. The formulas were designed to hedge during periods of heightened volatility or severe equity market weakness, both of which are occurring again.

Given the steep decline in bonds over the past two years, the Fed set to further tighten monetary policy by raising the Federal Funds Rate, and parts of the yield curve are already inverted, I believe the downside risk to bonds is likely minimal going forward while the downside risk to equities remains much higher.

Relative to other strategies, we performed very well last month due to the large allocation to the S&P 500, which was one of the top-performing equity indices last month.

Portfolio Shield™ will continue to hold the two Simplify funds (SPD & QQD) with the embedded downside put options, to further control any downside risk in equities.

Portfolio Shield™ is coming off one of its worst quarters in history and I am pleased to see that last month it is gaining back some of the ground it lost relative to the broad market. It is important to understand that Portfolio Shield™ was designed to hedge in advance, not after an event, which means there have and will be times it is early.

This first quarter was one of those times it was early and the hedge got caught in the largest and steepest bond sell-off since the 1930s. Truly, a one-off event. While this is unfortunate, it doesn’t invalidate the strategy or its effectiveness over the long term.

Portfolio Shield™ was designed to target rolling 3- to 5-year returns. For those who have been in the strategy for many years, they have seen just how well it does despite one bad quarter. Those who are relatively new to the strategy are likely concerned that it doesn’t work or is ineffective. Perception of how well Portfolio Shield™ works is commensurate with one’s time in the strategy.

We do not target month-to-month, quarter-to-quarter, or even year-to-year returns, although the strategy frequently does well year-to-year. Even with one bad quarter, Portfolio Shield™ is still performing extremely well over the past 3- to 5-years.

A good friend said investing is like baseball. There’s a reason there are nine innings. You can have one bad inning and still win the game.

Overall the goal of Portfolio Shield™ during down markets is to lose less than comparable strategies by hedging, and then redeploying the hedge back into equities near the market bottom or shortly thereafter. With equities potentially in the early stages of a Bear market, I am confident that Portfolio Shield™ will shine again.

Please understand that Portfolio Shield™ was designed to reduce risk, not eliminate risk. In a down market, it will lose money but as I mentioned before, the goal is for it to lose less and then redeploy the hedge back into risk assets somewhere near the market bottom. With equities likely in the early stages of a Bear market, Portfolio Shield™ will have another opportunity to do what I designed it to do.

Thank you for your continued trust in allowing me to manage your money with Portfolio Shield™.

Portfolio Shield™ reduced its allocation to SPD & QQD and added a position in TYA for May across all models.

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®