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This simple, effortless portfolio makes money during booms and busts


Yes now. That’s good.

Very interesting.

And – potentially – very profitable.

Especially if you want your savings to work and make you money in any environment—boom and recession, crash and frenzy, deflation and inflation, stagflation and apocalypse.

And especially if you think you’ve sweated enough to actually make your money without wanting your money to make you sweat even more every time you check your 401(k).

I just signed up with Doug Ramsey, chief investment strategist at money management firm Leuthold & Co. in Minnesota. He has tracked a portfolio of a wide range of assets over the past 50 years and I wrote about it before. But after our talk and with some further analysis, Ramsey came up with a refinement for his All Asset No Authority portfolio.

He built an even better mousetrap.

AANA’s initial portfolio consists of equal investments in seven different asset classes: US large-cap stocks, US small-cap stocks, US 10-year Treasury bonds United States, U.S. Real Estate Investment Trusts, international stocks, commodities and gold. It’s a beautifully simple “all-weather” portfolio.

As we mentioned, Ramsey found that this simple portfolio, adjusted only once a year to restore it to equal weighting across all seven asset classes, performed excellently over the course of the year. every environment for the past 50 years. Half-century returns are almost as good as the S&P 500, but with a fraction of the risk and without the deadly “lost decade.” The return beat out the so-called “balanced portfolio” of 60% US stocks and 40% Treasury bonds.

But, with that said, Ramsey has improved on that now.

One of his remarkable findings about these seven asset classes is that in any given year your best single investment is likely to be the second best investment the previous year. In other words, last year’s silver medalist is likely to be this year’s gold medalist.

So I asked him what would happen to this portfolio if you converted it from seven equal parts to eight equal parts, including a double investment in the silver medalist last year. ?

Bingo.

He just got back to me. And, looking at the numbers from 1973, he found that this portfolio produced even higher returns and even lower risks. What’s not to like?

Adding an additional investment in last year’s silver medal winning property would increase the average annual return by about half a percentage point a year.

Over half a century, it even beats the S&P 500
SPX,
-0.40%

for long term total return: While hitting it in a slanted hat for consistency.

Measured in constant dollars, that is, adjusted for inflation, this portfolio should earn an average compound return of 6.1% a year. S&P 500 for that time period: 6.0%.

But the worst five-year performance you’ve suffered during that half-century from Ramsey’s all-improved portfolio was a return (in constant dollars) of 3%. In other words, even in the worst case, you keep up with (just) inflation.

The S&P 500’s worst performance over that period? Try negative 31%. No, really. In the mid-1970s, the S&P 500 index cost you a third of your purchasing power even if you held it, in a tax-free haven, for five years.

For half a century, the S&P 500 has lost purchasing power over a five-year period about a quarter of the time. (Again, that’s before taxes and fees.) Theoretically, it’s easy to ignore that and think long-term—until you have to live through it. As research consistently shows, most investors can’t. They give up and bail. Usually not the right time. Who can blame them? Are you losing money year after year with seemingly no end in sight?

So, $1 invested in the S&P 500 in 1972 will buy you less than 12 years later, in 1984. And $1 invested in the S&P 500 at the end of 1999 will buy you 13 years less later. , in 2012. Including dividends – and before taxes and fees.

Of Ramsey’s seven properties, last year’s silver medalist was gold (yes, yes, I know, how can gold be silver?). Bullion actually broke even in 2022, behind commodities, but beating everything else.

So, with the help of Doug Ramsey, in 2023 our modified all-asset portfolio consists of 12.5% ​​or 1/8 of each at large cap companies, small caps, international securities, real estate investment trusts, 10-year Treasury bonds and commodities, and all 25%, or ¼, in bullion: Which means, say, 12.5 % per bar in ETF
spy,
-0.38%
,

IWM,
-0.65%
,

VEA,
-0.10%
,

VNQ,
-0.17%
,

IEF,
-0.27%

and
GSG,
+1.02%

and 25% in
sgol,
+1.10%
.

There are no guarantees, and there are plenty of caveats. For example, most money managers – even those who like gold – will tell you there is a lot of gold. Whereas gold and commodities do not earn income, which makes them very difficult to value under modern finance. There are legitimate questions raised about the investment role of gold in the modern economy, when it is no longer even a formal currency.

Again, you can give serious warnings about any type of investment.

The track record of this portfolio comes from half a century of data. Are the “conventional wisdom” portfolios spread across Wall Street based on something stronger? And how much of it is based solely on performance data since 1982, in an era when falling inflation and interest rates drove both stocks and bonds down?

As always, you pay your money and you have your choice. At the very least, I’ll check here from time to time to see how Ramsey’s two mousetraps—AANA and innovation—are working. Keep stable.

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