Three years ago I designed a simple retirement portfolio to illustrate to a close friend how poorly his professional investment advisor was handling his investments. This was a man in his early eighties who had no desire to manage his own investments. At that time, I had far less market knowledge than I have now and I was just starting to get a glimpse of the big picture.
I decided to limit the portfolio to a total of ten equities for simplicity, and admittedly it was very concentrated and not “well diversified.” It contained no bonds. The holdings included: SPDR Gold Trust ETF (NYSEARCA:GLD), iShares Silver Trust ETF (NYSEARCA:SLV), BP Prudhoe Bay Royalty Trust (NYSE:BPT), Pengrowth Energy Trust (NYSE:PGH), Enerplus Resources Fund Trust (NYSE:ERF), Energy Select Sector SPDR ETF (NYSEARCA:XLE), iPath DJ-AIG Agriculture Total Return Sub-Index ETN (NYSEARCA:JJA), PowerShares DB Agriculture ETF (NYSEARCA:DBA), ProShares UltraShort Financials ETF (NYSEARCA:SKF) and ProShares UltraShort Real Estate ETF (NYSEARCA:SRS)
There was no trading over the three year period, just ten picks that were bought and held with no fine tuning. If actual money had been invested, I would certainly have unloaded the two inverse funds at some point, and if that had been the only two trades, would have significantly improved the three year portfolio return.
Here are the holdings and three year returns of that portfolio, really only an exercise to illustrate a point:
Equity % holding Sector 3 yr gain/loss
GLD 30% PM +47.16%
SLV 30% PM +87.05%
BPT 5% OIL +37.39%
PGH 5% OIL + GAS -27.89%
ERF 5% OIL + GAS -26.74%
XLE 5% ENERGY +0.34%
JJA 5% AGRICULTURE -8.59%
DBA 5% AGRICULTURE -19.91%
SKF 5% INVERSE FINANCIAL -44.33%
SRS 5% INVERSE REAL ESTATE -84.47%
Total 100% +35.55%
So, overall, the model portfolio was 60% invested in precious metals, 20% in energy, 10% in agriculture, and 10% in short positions. Yes, this would generally be considered very speculative holdings for a retiree, but looking at the results, it still outperformed any standard asset allocation recommended by professionals, with a relatively low level of risk.
Diversification for the sake of diversification may limit the amount of loss in a portfolio based on the generality that some investments go up as others go down, so holding many various investments will average out to limit total losses. By this same exact reasoning, diversification will also limit total gains.
From February 24, 2008 to yesterday, March 22, 2011, this portfolio returned 35.6% in capital gains, and roughly 40% total return including cash distributions over a 37 month period, resulting in a total return of approximately 1% per month.
These total portfolio returns were realized even though four of the ten picks had negative total returns, and six of the ten picks had capital losses.
During this same period, the S&P 500 index lost 3.75%
During this same period, ten year US Treasury yields declined from 3.53% to 3.33%, so holding ten year US Treasuries would have yielded about 10% in total interest and 5.67% in capital gains.
This three year period included the sharpest market decline since the Great Depression of the 1930’s, beginning with the market collapse in October 2008 which ultimately bottomed in March 2009.
This exercise was designed to illustrate the benefits of identifying a long term market trend and making simple, undiversified bets on that trend, with no short or medium term trading. Even though many of the choices did not perform well, the portfolio did well based on the identification of the long term primary UP trend in precious metals, and concentrating in that area.
This next model portfolio is based on the same principle, along with an incredible amount of market knowledge gained through thousands of hours of reading over the last three years.
It is even more concentrated (less diversified) than the first portfolio, but that is based on market trends and fundamental changes I observed over the last three years. The question here is not, “do you want to allocate according to established principles and standards of investment professionals”? The relevant question is “do you want to make money/protect your savings against inflation”?
I designed this next portfolio without much analysis of the individual holdings, spending only about half an hour total on Sunday, March 20th, 2011, using the closing prices from the Friday, March 18 trading session. Once again, I limited the portfolio to a total of ten equities for simplicity. Once again, no bonds or bond funds are included, even though interest rates are clearly headed higher, and an inverse bond fund would clearly be a good investment at this point in time for a long term hold.
I just decided to go with a slightly more conservative approach. Silver has been greatly overweighted compared to gold, as the supply and demand fundamentals are far stronger. The overall portfolio is even more concentrated in precious metals than before (80% vs 60%), but is now diversified into six separate holdings instead of just two. The holdings include: Sprott Physical Silver Trus (NYSEARCA:PSLV), ETFS Silver Trust (NYSEARCA:SIVR), Sprott Physical Gold Trust (NYSEARCA:PHYS), Central Fund of Canada (NYSEMKT:CEF), Central Gold Trust (NYSEMKT:GTU), Silver Wheaton Corp. (NYSE:SLW), BPT, Kellog (NYSE:K), ConAgra (NYSE:CAG), Kraft (KFT).
3/20/2011 - Portfolio for the next three years:
Equity % holding Sector
PSLV 30% PM
SIVR 30% PM
PHYS 5% PM
CEF 5% PM
GTU 5% PM
SLW 5% PM
BPT 5% OIL
K 5% FOOD
CAG 5% FOOD
KFT 5% FOOD
This portfolio is already up 3.74% at close of trading yesterday after only two days, but I don’t intend to check it regularly. I will come back to analyze the progress after one year, two years, and three years.
NOTE: This is only an exercise to illustrate a point: that standard portfolio allocations by most investment professionals are FINANCIAL SUICIDE! I would NEVER in real life recommend that anyone have 100% of their investments or retirement portfolio in equities (of ANY kind). I would recommend that most people keep 80% of more of their precious metals holdings in PHYSICAL BULLION (bars and rounds) and pre-1965 US 90% silver dimes, quarters, and half dollars (junk silver). The main purpose of holding physical metal is to eliminate the MANY layers of unnecessary counterparty risk involved with holding ANY kind of equity. I recommend against holding numismatic coins, or ANY kind of “collectible” as an investment. Owning one small piece of real estate to use as a primary residence would be advisable for many, preferably with no mortgage, or a small, fixed rate mortgage.
Disclaimer: Do not use this model portfolio as investment advice. Your own portfolio should be customized for your individual situation. Always consult a financial professional, but avoid the 98% of financial professionals that don’t think for themselves, and don’t have a thorough knowledge of the fundamentals and long term trends in the precious metals markets.
Disclosure: I hold none of the equities listed in the above article, and have no intention of purchasing any in the near future. I am long physical precious metals.