Model Asset Allocation
for the Times Ahead
Asset allocation is more of an art than a science. Those who tout complicated formulas with over-confident certitude will eventually see their portfolios fail spectacularly. Especially under unanticipated market conditions. Nothing is certain, and no formula can tell you exactly how to allocate your assets optimally for an unknowable future.
Many people make the mistake of choosing investments based on what’s worked in the recent past or been hot lately. Chasing momentum is a dangerous practice. It can cause you to buy at or near market tops.(It’s why we recently warned against the “hot” biotechnology sector even though we previously wrote favorably on its fundamentals.)
Others assume falsely that holding bonds and cash equals safety. On any given day, dollar equivalents will be less volatile than other assets. But from a long-term perspective, being overexposed to U.S. dollars is potentially riskier than being all-in on stocks or precious metals or other assets. Under our monetary system, cash is guaranteed to lose purchasing power over time. Right now the currency depreciation is occurring gradually, but it could accelerate in the near future. Federal Reserve Chair Janet Yellen has indicated a preference for higher rates of inflation.
How to Build Your Model Safe Harbor Portfolio
The closest thing to a fail-safe, all-weather portfolio is one that is thoroughly diversified among both conventional and unconventional asset classes. Brokers and financial advisors
typically consider the value of diversifying only within conventional assets (i.e., stocks and bonds). Being 100% invested in financial assets, especially if they are all denominated in the same currency, is not true diversification!
For your serious money – not your play money or your speculation fund – you need to assemble a portfolio capable of providing positive after-inflation returns in various market conditions. One that you can rely on and stay with during bull markets, bear markets, and sideways markets.
Wise investors are prepared to deal with any contingency, including ones they don’t expect. That’s why you should consider setting up a permanent safe harbor portfolio – at least for the core, essential holdings that you need for your future financial security.
I present here a model portfolio that is just that – a basic framework for allocating assets that may help inform your own allocation. It’s not a formula or a prescription. How and where you invest must ultimately be based on your own life circumstances, goals, and risk tolerance.
Here, then, is Independent Living’s model Safe Harbor Portfolio:
- 35% Vanguard Total World Stock Index (VT)
25% Physical Precious Metals
- 12.5% gold; 12.5% silver
- 20% iShares Aggregate Bond (AGG)
- 5% Vanguard Total International Bond (BNDX)
- 5% iShares Barclays TIPS (TIP)
- 5% SPDR Global Real Estate (RWO)
- 5% Treasury Bills or Cash Equivalents
Model Portfolio for Inflationary Times
The Safe Harbor Portfolio won’t deliver spectacular returns in any given year. It will protect you from inflation, but if your aim is to grow rich from inflation, then you might consider setting up this more aggressive portfolio. Independent Living’s newly updated Model Portfolio for Inflationary Times features overweightings in precious metals, resource stocks, and foreign assets.
There is no single asset that is guaranteed to beat inflation over any given time period, but the following Model Portfolio assembles a number of assets that, taken together, can help you weather an inflationary storm of virtually any shape, size, or duration:
40% Physical Precious Metals
- 15% gold; 15% silver; 5% platinum;5% palladium
- 10% Vanguard Total World Stock Index (VT)
- 10% Vanguard Emerging Markets (VWO)
- 10% Market Vectors RVE Hard Assets Producers (HAP)
- 10% SPDR Global Real Estate (RWO)
- 5% iShares Barclays TIPS (TIP)
5% SPDR International Inflation-Protected
- 5% Market Vectors Gold Miners (GDX)
- 5% Merk Hard Currency Fund (MERKX)