The Best Investment Assets For John Bogle and Harry Browne
A strategy for a peaceful night's sleep
In the investment world, we always try to optimize our return and our risk.
We want to make as much money as possible with as little volatility. And, of course, that's not possible.
It's like when you want to drink beers all the time but don't want your belly to get fat. That's not possible, either.
Today we will tell you about a type of investment portfolio that can offer a good return with low volatility.
This squaring of the circle would be achieved by mixing two great strategies that we have discussed in the past:
John Bogle's (and his index funds).
And Harry Browne (and his permanent portfolio).
But before we get down to business, let's briefly recall what each of these strategies consisted of individually:
Bogle's strategy: buy the world and let time pass.
The Bogle strategy involves investing in index funds (equities and bonds) and letting the market do its job.
The more equities, the higher the returns, but also the higher the risks, and vice versa.
So far, nothing new.
The point is that although this strategy has performed very well over the last 40 years, there is no guarantee that it will continue to do so.
It will probably continue to perform well, but we can't know.
What if China ends up becoming the leader of the world economy? What if central banks never print money again?
Remember that if China becomes the world's new economic benchmark, it is hardly weighted in our indexed portfolio because of its difficulty.
On the other hand, we cannot forget the undervalued "long-term" concept.
With index funds, you can spend ten years flat or have 50% drops that make all your last decade's gains evaporate in the blink of an eye.
It's a reality we must be willing to accept.
And I know that everyone thinks they can withstand these ups and downs without any problem, but the truth is that the people who can really withstand something like this are in the minority.
That's why you should look in the mirror and determine whether or not you really are one of those people.
Because it is possible (indeed, it is likely) that you are not.
And if you are not, you should look for an investment and portfolio model that best fits your return and risk expectations. Maybe it's an asymmetric portfolio.
Browne strategy: sexy foursome and go to sleep.
On the other hand, we have H. Browne's permanent portfolio, which we have already talked about on occasion.
This portfolio is a simplicity-made investment: 25% to equities, 25% to bonds, 25% to gold, and 25% to cash.
If something goes up or down a lot, we rebalance. At the end of the year, we also rebalance.
We do NOTHING else.
It's a portfolio that says "invest and go to sleep" (something I find very appealing).
It underperforms Bogle's investment strategy (especially if the latter is heavily weighted in equities).
So for younger investors or those looking to maximize their returns, the permanent portfolio may not be the best choice.
It's time to get creative.
What if we mixed the two strategies?
We could have the peace of mind of the permanent portfolio and the profitability of the Bogle strategy.
Of course, we would not get the same results at the same level, but we would get higher returns and greater peace of mind (although the returns would not be as high as in the Bogle strategy, and the peace of mind would not be as high as in the permanent portfolio).
And how do we construct this Bogle-Browne portfolio?
For example, by dividing the capital equally:
50% to the Bogle index funds.
50% to Browne's permanent portfolio.
It couldn't be easier.
Now, does it make sense to do this?
Let's see what the three main benefits of such a portfolio are:
1. Multiplier effect
Call it what you will. The first benefit of a Bogle-Browne portfolio is that we get more protection against various types of scenarios.
A traditional index fund portfolio is very focused on performing well in a specific scenario (bullish markets and economies), and this will be all the more so the greater the weight of equities in the portfolio.
In bear markets, however, Bogle falters. Hence the importance of the long term.
The permanent portfolio offers us greater protection than Bogle's in down periods, but we lose that extra return that indexed portfolios give in up periods...
... which brings us to the second advantage of the Bogle-Browne combination.
2. Higher profitability than with the permanent portfolio... And then with some Bogle!
The Bogle-Browne portfolio has the advantage of being more profitable than the permanent portfolio.
If you stop to think about it, this is obvious: we are dedicating half of our capital to a type of investment that prioritizes profitability, which we do not do with the permanent portfolio.
We stay more protected against different scenarios than with the Bogle portfolio.
And in addition, we obtain more profitability than with the permanent portfolio.
Let's say we get the best of both worlds without maxing out.
I don't know about you, but it seems like a fair deal.
Also, a funny thing happens:
Not only will we get a better return than the permanent portfolio, but according to various simulations, we will also get a better return than with different Bogle portfolio models.
As you know, Bogle portfolios can have various equity/fixed-income weights (100/0, 90/10, 80/20...), depending on the investor's risk aversion.
If we compare the Bogle-Browne portfolio to a typical Bogle portfolio, consisting of 60% equity and 40% fixed income, we find that the returns are roughly on par. As we see below:
3. Nice and Cheap Portfolio
A final advantage of this portfolio model is that it is very cheap.
Well, because you can build your portfolio based on ETFs and index funds, which you know have ridiculously low costs.
This is obvious for the Bogle strategy part (after all, that model is based on indexed investing), but it is also true for the permanent portfolio part. However, it is not so obvious (you can buy gold ETFs and index funds, for example).
So, if you decide to set up such a portfolio on your own, the fees will be around 0.3%.
If you rely on Robo advisors for the indexed part.
The problem with all this?
What you see below:
Never before has this portfolio behaved so badly. There are years that it behaves badly, rather, very badly. It seems surprising what has happened this year.
How to avoid it
It is easy to take this portfolio to a third level and make it even more asymmetric like ours. Buy more uncorrelated assets that will allow us to better withstand these market swings and benefit from black swans.
To do this, it is important to use options and Bitcoin/Ethereum. We believe that no other assets allow us to implement this type of strategy.
These strategies allow us to be tremendously anti-fragile in the long term and to have money when the rest of the market is short of liquidity.
The proposal above is your solution if you do not want to complicate the portfolio. This is what I recommend for a person who does not like to be on top of their investments. However, if you want to take your finances to a second-order level, the ideal would be to start with an asymmetric portfolio.
Now our portfolio: