I did a portfolio review back in July of this year, when we were still in the midst of the pandemic and the markets had begun their recovery trend from the bottom we saw in late March. Since then, as far as the pandemic goes, it is is still raging and if anything, in the past one month it has been on tear! We are seeing hospitals getting overwhelmed, the number of Covid cases and death toll reaching new heights every passing day!

Amidst it all there is some good news as well. Vaccine genie is out of the box, with Pfizer Bioentech vaccine already reaching out to medical professionals and the elderly in the US and the UK. Moderna vaccine which does not require cold storage, is also now approved for emergency use and the first shipment left distribution center in the past week. Yet another vaccine, developed by AstraZeneca in collaboration with Oxford university has shown promising results in their phase III trials. The later is in particular a good news for the third world since the Astrazeneca vaccine is lower cost alternative to Pfizer/Moderna mRNA vaccines and has a shelf life of 6-months in standard refrigeration.

It seems there is light at the end of the tunnel should we as a society manage to overcome the ongoing and hopefully the final COVID virus surge!

A K shaped recovery is quite evident both in the markets and the economy as a whole. Those with investments in the markets have done themselves extremely good, especially those who are invested in the big-tech behemoths and Tesla! Millions of ordinary folks who work in the gig economy have been left by the wayside.

Fortunately, Mr AVI and family have been thus far sparred the wrath of the virus and the stress and hardship of economic calamity such as job loss or heavy losses in investments! I must acknowledge an element of  luck involved in where we find ourselves in this unprecedented environment. We are lucky to have two wonderful and healthy kids, we are lucky to have a roof over our head and Mr AVI is lucky to have a relatively stable working career and so is Mrs AVI lucky to be offering her service to families in desperate need of child-care services.

I am reminded of a quote by Joan Didion, which goes as follows: “do not whine, do not complaint, work harder”. In the spirit of this quote, I also want to also acknowledge tireless hard work of caring for two kids home-schooling, while working full-time and running a functioning household that both Mr and Mrs AVI have pursued through out the year as  well as diligent adherence to Mr AVI investment philosophy that has played a role in AVI family being able to live through this unprecedented times and come out better on the other side (proverbially speaking), both in terms of health and wealth!

It seems, I went on a tangent too far to have completely forgotten the topic of todays post, which is year end AVI family investment portfolio review. Without any further ado, here we go!

AVI Portfolio and Performance

The chart below presents performance of AVI investment portfolio (a combination of retirement accounts and non-retirement brokerage accounts) for the year to-date, plotted together with the Personal Capital Blended portfolio benchmark, which is a mix of low-cost ETFs designed to represent a combination of five major asset classes- US equities (VTI), International Equities (VEU), US Bonds (AGG), International Bonds (IGOV) and alternatives (equal mix of VNQ/IAU/DBC).

The correlation of AVI-Portfolio with the Blended portfolio is quite stunning! This despite a very diverse mix of active-passive strategy that I have adopted in the construction of AVI portfolio.

Below is the break down of various accounts in the AVI portfolio

A few observations to be drawn are:

• Mr AVI Roth and Mr AVI 401K accounts out-performed the markets (S&P 500 14.62 % year to date). The out performance in 401K account can be attributed to the decision by Mr AVI to pull forward his monthly contributions into 401K account as the pandemic hit in late March. By July of 2020, Mr AVI was fully vested in 401K.
• The out performance in Roth IRA account can also be attributed to some active investment decisions by Mr AVI. As the pandemic hit, Mr shuffled some funds in the Roth account, selling short-term bond and gold ETFs to purchase shares of beaten down stocks (in this case, BRK.B, BUD, DIS and DAL). While the investment in DAL has yet to pan out, the DIS investment has paid of quite well leading, a key contributor to the out performance of this account.
• Equity Brokerage account also outperformed the markets. This can be primarily attributed to the vesting of Mr AVI employer stocks and the subsequent gains in the stock price.
• The two IRA accounts performed quite similarly but could not have been more different in terms of strategy. IRA 1 is an active stock account, where as IRA 2 is passive account primarily comprised of the Applied Value portfolio ETFs.
• The massive drawn down in value stocks and the muted recovery since (but for the gains in the last month or so) have been a damper for Mr AVI active equity investment portfolio’s, which include the IRA 1 account as well as the active brokerage account.
• Robo advisor investments fared rather unexpectedly, especially considering the investments are (hopefully) designed to offer protection on the downside and participate on the market uptrend. From the pre-pandemic peak reached on Feb 19th through the market bottom on Mar 23rd, this account suffered a drawdown of ~45 % and since has recovered ~64 %.

Portfolio Distribution

The table below presents the distribution of various asset classes in AVI portfolio as of this writing and its comparison to the distribution of assets mid-year.

The biggest difference in asset distribution relative to mid-year is the percent of cash in AVI portfolio. Back in July when pandemic effects were still being felt in the markets, AVI portfolio was almost 100 % invested. However, as of this writing, I have a strong conviction that markets are bordering on insane valuation with bargains increasingly difficult to find. As such AVI portfolio is now heavy on cash sitting on the sidelines waiting to seek an opportune moment to put the dry powder to use.

Another change worth noticing is the modest but observable increase in the assets belonging to the alternatives asset class. This change is reflective of Mr AVI desire to increase the allocation to gold and gold-backed assets. I do not see the macro environment of easy money changing any time soon and am vary of an impending inflationary environment. What better asset to protect against inflation than gold!

The glaring omission in AVI asset distribution is that of bit-coins, an asset class that has seen massive gains in the year 2020 since the pandemic! While it would have been prudent for me to have some exposure to this asset class back in March, I am now not comfortable investing in this asset class at current valuations.

The chart below shows the distribution of top 10 equity positions in Mr AVI portfolio (and the profit/loss in these positions since purchase).

• Relative to the situation mid-year, the biggest difference is the absence of AAPL from the top 10 holdings, which was about 8.2 % of AVI portfolio in July of the year and is now below 2 % in AVI portfolio.
• Mid-year 6 of top 10 positions were in red and now only two are in red.
• INTC, JPM, PM and BTI are the new entrants in the top 10-holdings displacing AAPL, BA, GS and MMP.
• FB remains the largest holding in AVI portfolio although at a much lower percent relative to those held mid-year.
• Top 10 positions back in July represented about 51 % of AVI portfolio and now they represent 36.7 %. The decrease is primarily attributed to some profit taking and move towards increasing cash position in the portfolio.

Back in July, AVI portfolio was quite aggressively invested and now it has fallen off the efficient-frontier curve, with a significant drop in the historic portfolio-risk metric. The drop-off from the efficient-frontier curve can be attributed to the heavy cash bias in the portfolio.

As I am writing this, I realize that AVI portfolio is now too-conservative, especially given the level of emergency funds cushion that is built into the net-worth of AVI family. In the new year, I hope to be more aggressive in my search for bargains in the markets especially in the sectors of the market that took a massive hit in 2020 and are yet to recover to pre-pandemic levels…

Taxable vs Non-Taxable Accounts

Here’s the comparison of assets in the taxable vis-a-vis non-taxable accounts. As a reminder, the non-taxable accounts include individual IRAs (traditional and Roth) and company sponsored 401-K account.

A few observations in terms of changes since July

• Taxable portfolio is now approaching 70% of total AVI investment portfolio. This is primarily due to the limitations in terms of contributions of outside funds that I can make into the non-taxable account.
• Alternatives now represent about 5 % of taxable investment portfolio, which was close to zero mid-July.
• While I was almost fully invested in mid-July, I now have significant cash holding in both taxable and non-taxable accounts.
• Exposure to intl stocks has increased in non-taxable account, and as such there is some what of a parity in terms of exposure to US markets and international markets in both my taxable and non-taxable accounts.

And here is the snapshot of overall AVI portfolio as it stands heading into the last week of 2020!

• The number of investments in the red have drastically reduced from 17 mid-year to 7 as of this writing.
• WFC, BA, DAL, EAF and MMP remain the duds they have been mid-year. I do have high hopes though for all these stocks, as we come out of COVID-pandemic and into the new year. If I have to venture a guess, I would be highly surprised if any of these remain the duds they have been in 2020, at the year end 2021.
• FB and BRK.B remain the largest two holdings in AVI portfolio going into year end
• Cash now represents a massive 16.85 % of total AVI portfolio. I sure hope markets offer an opportunity for me to put this dry powder to good use in the new year!

Synopsis

• I am going into the year end with significant dry power waiting on the sidelines to be invested.
• If markets continue on tear as they have been, some of this dry powder will be used to hedge my portfolio. Should Mr Market catch a cold instead, the dry powder will be imminently deployed to buy into some great companies that I have on my radar for some time now!
• My exposure to alternative assets, in particular Gold is merely 3.1 % of AVI total portfolio. I want to change this and as part of a hedge, I may consider increasing the exposure to Gold backed assets or Gold mining companies upto 10 % of total portfolio.
• After a bumper year in 2019 and through all the turmoil of year 2020, ending the year at a Portfolio annualized return of 13.45 % sure feels good.

On this positive note, adios to the year that has been unprecedented on many levels and wishing all the best to all fellow-investors out in the world!

Video/Book/Article/Audio for the Week

• Podcast of the Year: Recently Shane Parrish, of the Knowledge Project Podcast, put put a twitter poll soliciting folks to vote the best podcast they have heard in the year. While I noticed some recency bias in the suggestions by people, Tim Ferriss podcast with Seinfeld was voted by many to be the best and I must say it was pretty darn good! For me though, it was a hard choice, and my vote goes to Rationale Reminder podcast with Prof. Lubos Pastor.
• Book of the Year: I started out the year on a high note, with a desire to read atleast a few fiction books. I went as far as to shortlist a few books to read. Alas, I managed to finish none! Things were not that bad on the non-fiction end of the spectrum though. I managed to finish reading both of Gregory Zukerman books, on John Paulson as well as on Jim Simons, a must ready for finance nerd for sure! I also got my hands on Seth Klarman’s book, Margin of Safety and managed to get through most of the book. Along the way, I managed to lay my hands on several of the Market Wizards books by Jack Schwager and a couple of technical books on options trading. However my book of the year has to be by Daniel Crosby, titled, the laws of wealth!
• Show of the Year: There were several contenders, especially sitting at home the whole year, from Mirzapur on Amazon Prime, to the Queens Gambit and the Crown on Netflix. For me though, hands down the best binge worthy show was, the Grand Tour on Amazon Prime (which I admittedly discovered only this year). I was never a car guy, however since watching the ever green James May and the hilarious Jeremy Clarkson and Richard Hammond parade through some of the fascinating cars of yester years and the modern era, whats not to like about the show!