Shannon’s Demon

Buffett famously said he had never had less than 90% of his assets in stocks.

This is an update on the Constant-Proportion Rebalanced S&P 500 ETF Portfolio Experiment that started with real money in August 2023.

At the start £10000 was split equally in cash (money market fund) and stocks(S&P 500 ETF).

The weights stay 50% in cash and 50% in stocks no matter how each basket moves thanks to rebalancing.

Taking the wisdom from Omaha in theory Shannon’s Demon could be used for 20% of the portfolio.

That would mean 10% going into cash and 10% into stocks in the above project.

The previous blog on the subject can be found here;

Shannon buy the dip and sell the rally experiment

Since August 2023 the S&P 500 index has gone up pretty much in a straight line.

Only once was a previously sold ETF share bought back cheaper.

That was awfully little buying the dip action since inception.

Putting the £10000 all in the S&P 500 ETF obviously would have been the better option.

The objective of Shannon’s demon is to get better risk-adjusted returns.

Not to make most money.

Volatility is harvested and used to moderate volatility.

The Fidelity Cash W Inc Fund is now worth about £ 5768.

The Fidelity short term cash option has a yield of about 5% now.

The good news is that the inflation in the UK is only 2.5% or so and the cash option should protect the purchasing power.

Berkshire also has parked plenty of money into short term cash and that can be seen as a vote of confidence for this asset at the moment.

The iShares Core S&P 500 Etf (IUSA) is worth around £ 6037 now.

The IUSA ETF has a dividend yield of 1%.

Clearly a small rebalance is overdue.

That will be done when I get my next free monthly trade from my broker.

Commissions are not a friend of this strategy after all.

So rebalances are only done when the ETF can be traded commission free.

Shannon’s demon project is now about 4.2% of the portfolio.

There is room to increase and build on the experiment (up to maximal 20% of the portfolio).

For example;

 How would a Shannon’s Demon project of cash and Bitcoin turn out?

Shannon’s demon works best with two uncorrelated assets with each a positive return expectation.

The benchmark on the Sigfig website is now worth about $ 17261.

At current exchange rates that makes about £13888 for the VOO ETF value.

Dividends and interest income is ignored and excluded.

A lump sum investment in August 2023 into the S&P 500 ETF (VOO) would have returned an extra £2081.

That difference is significant, but acceptable as this project is a risk diversifier.

After all between 2000 and 2010 the S&P had a lost decade.

Shannon’s demon would have rocket if that happened again.

There is also a new old guy sitting in the White House; volatility is likely to stay higher during his term.

A lot of people saving for their retirement use the 60/40 portfolio.

That means they put sixty percent into bonds and forty percent of their portfolio value into stocks.

Bond yields are now at more reasonable levels again.

Clearly the extremely low bonds yield of the past decade didn’t compensate for the risk of inflation and loss of purchasing power.

Shannon’s demon could potentially be used as an alternative to reduce risk as one gets closer to retirement.

The project will continue...

For now please make your own investment choices dear reader.

Good luck on your investment journey.

May the force be with the Shannon buy the dip and sell the rally experiment!

This blog is not advice on what you should do with your money and was written for information and entertainment purposes only.

It does not represent any offer, solicitation, inducement or invitation.

When you invest in the stock markets it is possible to lose money.

Please do your own research. If in any doubt what is best in your individual situation, please hire a licensed financial advisor. Good luck on your investment journey.

Holland Park Capital London hopes you enjoyed the information in the blog. Holland Park Capital London Ltd is not receiving any compensation from anyone to write this blog. Holland Park Capital London is long most of the stocks in the S&P 500 index and is also long the S&P 500 index ETF. Holland Park Capital London has no business relationship with any company whose stock is mentioned in this blog. Holland Park Capital London expressed its own opinions.

This is not advice.

Make your own decisions please.  Please go and see an authorized financial advisor before making any investment decisions. What works for Holland Park Capital London may well not work for you and your personal situation is unknown to Holland Park Capital London.

Stocks go up as well as down and you may get back less than you invest.

Any information in this blog should be considered general information and not relied on as a formal investment recommendation.

This blog is for information purposes only and helps Holland Park Capital London expand on the books “Beat the Stock Market Casino”  and “Stock Market Blah Blah” (available on Amazon) and brings extra discipline in the investment process.

Holland Park Capital London is not liable for any mistakes in this blog. This blog cannot be a substitute for comprehensive investment analysis. Any analysis presented in this blog is illustrative in nature, limited in scope, based on an incomplete set of information and has limitations to its accuracy. The information upon which this blog is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore the accuracy cannot be guaranteed. Any opinions are as of the date of publication and are subject to change without notice.