My investments are well diversified. I’m invested in foreign and domestic real estate, commodities, precious metals, domestic and international equities and foreign sovereign debt. However, I haven’t spent much time analyzing my portfolio allocation. While making money through investments is good, protecting what you have is paramount. As I grow older each year, volatility becomes a greater issue. In a few more years I'm not sure I’ll be able to stomach a 40% loss that the market experienced in 2008. (Luckily, my retirement account was down only 4% that year so I didn’t have to stomach anything!)
There are tons of great books available on the subject of portfolio allocation, but I wanted something easy to understand (and thus, remember). One of the better models I can across was Harry Browne’s Permanent Portfolio.
The basic premise is to cover all possible scenarios in your portfolio:
25% of the portfolio to protect against Inflation (eg. Gold)
25% of the portfolio to protect against Deflation (Cash)
25% of the portfolio to do well in a Bull Market (equities)
25% of the portfolio to do well in a Bear Market (bonds)
Taking it a step further you can add in protection against devaluation (eg. invest in foreign currencies and foreign bonds). You can also add in real estate or REITs as an inflation hedge, and foreign equities. The the basic premise is simple. You try and benefit from any sort of market.
This is pretty simple to implement. All you need is to do is buy low-cost ETFs and check your portfolio once a quarter to rebalance to the appropriate percentages.
If you like this philosophy but don’t want to implement it, you might want to take a look at the Permanent Portfolio Fund (MUTF:PRPFX) which is modeled and named after Harry Browne’s Permanent Portfolio. Over the past 27 years, it’s been down only 4 years. Maximum annual loss was 12% in 1984. In 2008, it lost less than 9%! It’s expense ratio is also reasonable at 0.82%. It’s 5-year average return is a respectable 10.3% vs say an S&P 500 index fund like (MUTF:SWPPX) which had a 5-year average return of 0.99%.
Its portfolio consists of gold, silver, Swiss franc assets such as Swiss franc denominated deposits and bonds of the federal government of Switzerland, stocks of U.S. and foreign real estate and natural resource companies, aggressive growth stocks and dollar assets such as U.S. Treasury securities and short-term corporate bonds.