Diversity
What is a Balanced Portfolio?
For those still in the mindset of what worked from the 80’s to 2020, a balanced portfolio generally means your non-pension investments are in stocks and bonds. Given the big cycle financial crisis we are in the early stages of and considering the probability higher for longer inflation through this crisis, stocks and bonds alone don’t provide the diversity needed to come through the crisis in good form.
Many thought leaders in the smart money world have a much different view of balance in their portfolio. Their views all tend to include a significant holding of real assets (gold, real estate, commodities, etc.) to diversify their portfolio for higher inflation. You can also find some of these thought leaders holding some cash, diversifying their portfolio for deflation. I’ve seldom, if ever, seen a financial thought leader invest exclusively in stocks and bonds these last few years. Here are two examples to increase diversification within the stock market.
Lyn Alden shares her Multi-Asset Portfolio each month in her newsletter. Her April 2024 newsletter (1) delves into why she is concerned about a portfolio with only stocks and bonds – basically because higher inflation is probable for this decade - then moves on to look at alternate portfolios with some real diversification.
She reviews the Harry Browne Permanent Portfolio and Meb Faber & Eric Richardson Ivy Portfolio as two examples:
·Permanent 25% stocks / 25% bonds / 25% gold / 0% real estate / 25% cash
·Ivy 40% stocks / 20% bonds / 20% gold / 20% real estate / 0% cash
She then explains her cornerstone concept of a three-pillar portfolio including specific profitable stocks, commodities and their producers, and cash-equivalents. She does this for a living and thus invests the time to research and select specific stocks and commodity producer stocks. Nonetheless, it provides a diversification example even for those of us that don’t do this full time:
· Alden 61% stocks / 0% bonds / 23% commodities / 0% re /11% cash/5% BTC
I agree with Alden that commodity producer stocks, chosen correctly, do provide the benefits of holding commodities more so than the risks of holding generic stocks. I also think her position in Bitcoin (BTC) reflects a forward-looking speculation on monetary change.
Jared Dillian developed and back tested his Awesome Portfolio (2) to measure returns relative to risk over a period of 50 years, beginning in 1972. Periods of high inflation in the 70’s and 2020’s thus are considered as part of his data set. His portfolio tends in a similar direction to Permanent and Ivy in that he diversifies into 5 equal segments:
·Awesome 20% stocks / 20% bonds / 20% gold / 20% real estate / 20% cash
He goes on to explain how this portfolio can be quite hands-off in its creation and maintenance. Its creation can be achieved with four ETFs accessible in the stock market and a cash savings account. Thereafter, it should be reviewed and rebalanced once per year.
If you need any further reinforcement about diversification beyond stocks and bonds, you should note the Canada Pension Plan (3) holds 26% real assets, including real estate, infrastructure, and energy. And the Saskatchewan Teachers Retirement Plan (4) holds 23.8% real assets including real estate and infrastructure.
If you have any interest in having a more diverse portfolio, it may be worthwhile for you to receive Alden’s free monthly newsletter with portfolio and/or download Dillian’s Awesome Portfolio.
Smart money thought leaders and large pension plans are diversified. Are you?
(1) lynalden.com/April-2024-newsletter
(2) jareddillianmoney.com/awesome-portfolio-details
(3) cppinvestments.com/the-fund/f2024-annual-report
(4) stf.sk.ca/pension-benefits/investments/portfolio/diversification