Jay Johannesen's  Instablog

Jay Johannesen
Send Message
Jay Johannesen is a principal and investment strategist at Portfolio Research, LLC. Jay holds an MBA from the Haas School of Business at the University of California at Berkeley and a CPA certification in Washington state. Portfolio Research is the leader in building risk controlled portfolios... More
My company:
Portfolio Research
  • The Catastrophe Portfolio – Chasing Strategies to Crash-proof a Portfolio 0 comments
    Nov 2, 2011 10:10 PM | about stocks: AGG, BWX

    What is the best way for risk-averse investors to crash-proof their portfolios? 

    This recent Reuters article Rich run for cover at turmoil hits wealth describes how high-net worth household investors are trying to preserve wealth through "catastrophe portfolios" and focuses on a particularly conservative model portfolio designed to preserve wealth in extreme financial turmoil.  This catastrophe portfolio is comprised of the following asset classes: 

    - 33% Gold
    - 33% Global blue chip stocks
    - 33% Developed World Govt Bonds

     From our perspective (among other concerns) this particular mixture of asset classes seems to suffer from recency bias – chasing after assets that have more recently performed well (gold which has risen spectacularly over the past decade, and blue chips which have out-performed other broad riskier asset classes the past few months) - but which will not necessarily fare well in potential future economic scenarios. 

    There are better ways to crash proof a portfolio – build a broadly diversified portfolio and re-balance it regularly.  At Portfolio Research, our lowest risk portfolio uses eleven broad asset classes and is currently weighted toward a blend of US bonds (for example iShares Barclays Aggregate Bond ETF - AGG), Global Bonds (for example SPDR Barclays Capital Intl. Treasury Bond ETF - BWX), TIPS (for example Vanguard Inflation Protected Securities - (MUTF:VIPSX), and Cash - along with exposure to REITs, commodity funds and equities.  Currently 86% of our "catastrophe portfolio" is allocated to the four lower risk asset classes, though this may drop in the future based on objective measures of volatility, correlation and return expectations.   

    And if you are too lazy to re-balance, even variations on the so-called "Lazy Portfolios" (33% inflation protected securities fund (such as VIPSX), 34% total bond index fund (such as VBMFX), 33% total international stock index fund (such as VGTSX) strike us as more sound Catastrophe Portfolios.

    Disclosure: I am long AGG, BWX.
    Stocks: AGG, BWX
Back To Jay Johannesen's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.