Some investment portfolios are designed to deal with economic uncertainty. They can offer peace of mind to the average investor and help you stick to your investment plan.
In times of economic uncertainty it can be tempting to take all your investment chips off the table and retreat to the safety of cash.
If you are very lucky you might time such a move perfectly, selling near the top making you feel like an investment genius. Trust me, it's not genius it is luck and you don't want to rely on luck for your portfolio returns.
Even when facing investment headwinds and predictable recessions it is usually wiser to stick with the strategy you designed to achieve your financial goals.
This is often painful for many investors as they can see large reductions in their portfolio value. These drawdowns test investment resolve and human emotions often sees the non-prepared investor sell at or near the point of maximum pain.
They then miss the recovery rally and swear never to invest again!
The key then is to avoid the gut wrenching plummets in portfolio values that prompt people to make emotional decisions. In designing a portfolio to do this you will forgo some of the positive returns but this may be worth it if you like to sleep well at night.
Fortunately there are some portfolios that have been designed with this in mind. I'll explain a few of them I call the "Recession Busters" below.
Harry Browne's Permanent Portfolio
Harry Browne was a libertarian who designed this portfolio to perform well in all economic conditions. It comprises equal parts of stocks, bonds, cash and gold.
The theory is that at least one sector of the portfolio will always perform well whatever the economic environment, mitigating losses in other sectors. Regular rebalancing is undertaken to maintain the equal investment weightings
Over the past 50 years or so, the permanent portfolio has had a maximum drawdown of around 14% (in early 1980s) and an average annual real return of around 5%.
It had twelve years of negative performance with most of those years losses less than 5%
Tony Robbin's All-Seasons Portfolio
The All- Seasons portfolio comprises:
30 % stocks 40% long term bonds 15% medium term bonds 7.5% commodities 7.5% gold
The average annual return is 5.5% and the worst drawdown was around 17%. While it had twelve years of negative performance over the time frame, the average loss was slightly higher than the permanent portfolio.
Larry Swedroe Portfolio
The Swedroe portfolio invests in the historically highest returning sector of the stock market while maintaining the bulk of investments in bonds.
The specific asset allocation is:
70% bonds 15% small cap value stocks 7.5% emerging markets 7.5% international small cap value
It has generated an average annual real return of 5.3% and a maximum drawdown of around 20%. This portfolio also had twelve years of negative returns with the worst annual loss being around 13%. In other negative years portfolio losses were mostly under 5%
Conclusion
The information above is not investment advice. It is merely a comparison of the different performance of three portfolios that are designed to do well in adverse economic conditions. They may or may not be suitable for your personal circumstances and I suggest you contact a professional adviser before implementing any investment strategy.
There are literally thousands of different investment portfolio ideas out there and some are not appropriate for individual investors.
The best portfolio for you will be the one that helps you achieve your financial life goals and allows you to sleep at night without worrying about your investments.
To achieve that you need to have an investment plan and stick to it.
Cory Bernardi is the author of seven books and has been a member of the Australian rowing team, a publican, an investment portfolio manager and spent nearly 14 years as an Australian Senator.
