The Sundial Dynamic All Weather Portfolio

The Sundial Dynamic All-Weather Portfolio framework attempts to achieve positive returns regardless of the macroeconomic regime, such as positive or negative growth, or an inflationary or deflationary environment.

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This is achieved through a few key portfolio construction principles:

1. Utilize multiple asset classes and strategies, beyond the traditional stock and bondpositions.

2. Utilize both active (tactical) and passive (buy & hold) exposures.

3. Recognize that some investments have a stability seeking (short volatility) bias, and others have an instability seeking (long volatility) bias, and it is critical that a portfolio contains both.

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We are often asked if an All-Weather Portfolio is really necessary.

If you want your wealth to be readily available whenever you would like to access it, without having to wait (hope) for a market recovery, then you need a portfolio that minimizes the risk of significant drawdowns.

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Sundial believes it has never been more critical to have an All-Weather approach for multiple reasons:

• The Stock & Bond only portfolio has always been a faulty model.  Stocks work best in times of economic growth, and bonds work best in times of low inflation or deflation.  Neither position should be expected to perform well in times of economic contraction or elevated inflation.

• The Stock & Bond only portfolio is also faulty as both instruments have a stability seeking (short volatility) bias.  This means when regime changes occur or markets are in turmoil, both stocks & bonds may suffer losses.   

• There have been long periods time where stocks and bonds were highly positively correlated meaning both stocks and bonds either made money or lost money together.    No diversification here.   The stock & bond only portfolio also performed quite poorly in the stagflation of the 1970s and the depression of the 1930s.

• It is estimated that algorithms provide as much as 80% of the market liquidity that is needed to transact.   When volatility picks up, these algorithms step away, and market liquidity is much lower right when it is most needed.   Additionally, the options market notional size traded is now larger than the underlying stock market.  Investors are generally long put options for portfolio protection. That means market makers are short put options. When markets fall, market makers short the equity market to hedge the put options they sold, and that can magnify the move lower in stock prices, particularly if market liquidity is lower.  These unique aspects are what can cause market overshoots to the downside like in the 4^th quarter of 2018, February & March 2020, and the 1^st quarter of 2022.   

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