Seaborn Hall, 2/14/20, updated 2/22/20

The portfolio below is based loosely on Ray Dalio’s All-Weather Portfolio Asset Allocations displayed in the chart below. Dalio’s portfolio is heavily weighted towards bonds (55%).

With bonds currently yielding so little interest, our ‘Perfect Storm’ portfolio is designed to be more weighted in equities and alternatives. There is an initial 10% allocation to bonds that the investor will gradually increase over time, hopefully, as you sell off profitable equities, trimming and re-balancing each category within that allocation.

The goal is to buy more bonds each time interest rates move higher – over years, we believe – reaching the goal of about a 40% bond allocation, a 20% alternatives allocation, and a 40% equities allocation.

Ray Dalio’s Asset Allocation Formula

This type of portfolio demands a little more work than Dalio’s All-Weather Portfolio. If the occasional monitoring and rebalancing doesn’t fit your personality there are a number of other suggested portfolios on the Lazy Portfolio ETF page (the charts on this link give you 10-year returns, risk profile, and maximum annual drawdowns, a very useful site).

This is an ongoing attempt to provide a globally diversified portfolio that is easy to manage, diversified, and somewhat safe regardless of the risks or actions of the market.

However it is an ongoing attempt, a modified version of Dalio’s strategy, and will be updated and modified based on emerging conditions and views. Except for re-balancing and the building phase of cost averaging, the bulk of this portfolio is meant to be held a minimum of 3-5 years. Check back with this page on a monthly basis.

Model $100,000 portfolio: Allocate equally the top 3 in categories 1-2 + top 2 in categories 3-4 for a diversified 10 item portfolio. The more line item choices, the more diversified and the less return and less downside expected in the portfolio. Selections beyond the top 2-3 in each category are optional. The Goal is an Equities 40% – Alternatives 20% – Bonds 40% portfolio. For a lower risk allocation: Equities 30%; Bonds 40% (Long term 25%; short-medium term 15%); Alternatives 30%. Cost average into all categories and buy on market corrections when possible. This is a medium risk portfolio. See the summary in Category 7 below for more.

 

Disclosure: The portfolio allocations below are provided for informational purposes only, they are not an investment recommendation, and the reader is advised to consult their own financial advisor before making investment decisions. There are other ETF choices that may be equal or better.

1 – Equities (Stocks) Allocation (40% target)

IWM iShares Russell 2000 ETF

See Morningstar rating here

IOO iShares Global 100 ETF

See Morningstar rating here

EEM    iShares MSCI (Morgan Stanley Capital International) Emerging Markets ETF

See Morningstar rating here

ARKK  ARK Innovation ETF

See Morningstar rating here

QQQ    Invesco QQQ [Technology] Trust

See Morningstar rating here

Notes: Buy equal allocations. QQQ and ARKK are riskier considering the high valuations in the Tech sector currently. (For example, see JP Morgan: Tech Sector In Bubble And Will Collapse). That said, they both have high upside as well, particularly ARKK. Either or both are optional depending on the investor’s risk tolerance. Some advisors believe Emerging Markets may have more upside and be a better value than US equites going forward (See Top Ten Reasons For Emerging Markets 2020). It is difficult to know whether to place EEM or ARKK in third priority position. A riskier portfolio might place priority on ARKK; a more conservative, diversified portfolio EEM. VTI, Vanguard Total Stock Market, is another option in the Equities category. VEA, Vanguard FTSE Developed Markets (100 largest stocks on UK market), is another option. One further note: ARKK bought Tesla on past dips and has been selling on the current rally; see here. Cost average in all categories and buy on market corrections, when possible.

2 – Bonds Allocation (40% target)

TLH iShares 10-20 Year Treasury Bond ETF

See Morningstar rating here

TIP iShares TIPS (Treasury Inflation Protected Securities) Bond ETF

See Morningstar rating here

IEI        iShares 3-7 Year US Treasury

See Morningstar Rating here

IGOV iShares International Treasury Bond ETF

See Morningstar rating here

TLT iShares 20 Year+ Treasury Bond ETF

See Morningstar rating here

Notes: 10% initial bonds allocation, equal allocations, to increase over the next five years to 40% through cost averaging in all categories. Allocate a heavier weight in TIP. Why international bonds? In a sustained US crisis that produces hyperinflation even US bonds will have high risk of devaluing or even collapsing. Having some international bond categories already up in your portfolio will give you alternative investment options for transfer.

3 – Alternatives Allocation: commodities, precious metals, real estate, MLP’s (20% target)

PIO Invesco Global Water ETF

See Morningstar rating here

IGF      iShares Global Infrastructure ETF

See Morningstar rating here

VNQ Vanguard US Real Estate ETF

See Morningstar rating here

GSG    iShares S&P GSCI Commodity Indexed Trust

See the Bloomberg description of the fund here

Notes: An international REIT (like VNQI) might be a good idea in the future as that market crests, declines, and bottoms. The US domestic real estate cycle is expected to top around 2025-26. General commodity or futures alternative ETFs could also be added here for greater diversification, though commodity funds in general have not done well over the last decade – this may make them a good contrary play at present. Wars have developed around water and water sources, and clean water, particularly, is in high need across the developing nations of the world. We consider water an essential ‘perfect storm’ investment. Another potential category here is Infrastructure. See this link for other suggestions. We are placing Infrastructure above Real Estate because we currently believe that Trump will be reelected and a US Infrastructure bill is likely to be passed in 2021.

4 – Gold/Silver Alternatives Allocation (included in Alternatives)

GLD SPDR Gold Shares

See Morningstar ratings here

SLV iShares Silver Trust

See Morningstar rating here

GDX VanEck Vectors Gold Miners ETF

See Morningstar rating here

GDXJ VanEck Vectors Junior Gold Miners ETF

See Morningstar rating here

Notes: Silver is undervalued relative to gold as of 2/18/20. Gold is a stronger purchase in the $1250/oz range or lower. Mining has more upside. We recommend owning some physical gold/silver in addition to ETFs since ETFs do not provide access to physical metals in a real, sustained crisis. There is also speculation that in a sustained crisis that, because of that fact, there might be runs on these types of funds that would cause them to crash.

5 – What About Cash And Forex?

Normally, cash allocation in a single portfolio is around 10% of the total invested in that portfolio. This gives you something for an emergency and also provides some funds to invest in the event of market corrections. Many investors allocate 20% or more to cash in the current environment because they believe the markets are overvalued and ripe for a major correction due to recession.

Our current philosophy is different – but that’s not to say that it is correct. We believe in a 5% allocation of cash and a 5% allocation to speculative investments (see below). This is based on our view that the stock market is driven by the 18.5 year real estate/bank leveraging cycle. Based on this view the markets are not likely to climax or top until around 2025-26 (this does not mean there will not be corrections – stock market corrections are normal – or, even an economic recession causing a sustained correction).

Notes: Some cash should be held in foreign currency. Some brokerage accounts have foreign currency options you can hold. Most brokerages have access to foreign currency ETF accounts. TIAA, formerly Everbank, has foreign currency money market accounts available. More in Part 2.

6 – Speculative Investments:* 2-3% Max Of Total Net Worth (optional)

Bitcoin, BTC

Ethereum, ETH

Notes: The beginning cryptocurrency investor may want to start with an account at the Coinbase Exchange. Instructions for opening cryptocurrency accounts can be found elsewhere on this site. A small allocation in crypto could be considered ‘alternative speculative.’ Actual Crypto ownership might be an essential speculative investment in a sustained crisis like hyperinflation (see links below). For more normal markets, the ETF ARKK in Equities sometimes represents the crypto space with allocations to Bitcoin or Blockchain based companies.

For more on use of crypto and other assets in crisis see, The First City In The World That Is Switching To Bitcoin, Melis, Medium; Also see, How Likely Is Hyperinflation In The US?, Seaborn Hall, Zero Hedge

7 – Portfolio Build Summary

Confused? If not, move on to the next section. If you are, here’s a summary of how to start building the Global Perfect Storm Portfolio.

In this example you have either $50,000 or $100,000 to invest.

Depending on whether you want an allocation to the Cash category and the Speculative category, divide your total amount to invest into ten or twelve ‘tranches’: equal allotments of either $5000 or $10,000 for ten tranches; equal allotments of either $4167 or $8333 for twelve tranches.

After opening a brokerage account at TD Ameritrade, Charles Schwab, or Fidelity – or another brokerage of your choice (Interactive Brokers is a valid choice, particularly for international investors) – begin by purchasing Equity ETFs (category 1 above) first. As laid out above, purchase the top 3 lines under the Equity Category in equal allotments (either EEM or ARKK, depending on your risk tolerance and individual preference) – using your first tranche only.

If you want greater diversification, divide your cash into more tranches and purchase one or more of the other ETFs in each category. Remember, we are initially allocating 70% to Equites and only about 10% initially to Bonds. This will be corrected over time – probably over the next 3 years or so as we rebalance as interest rates rise. Our goal is 40% Equities, 20% Alternatives, 40% Bonds.

If you want a lower risk profile instead of initially allocating more to Equites you can allocate more in the Alternative category or keep more money in cash. If you are very low risk – which means you favor protection over return – you can place the full allocation into Bonds immediately.

Other ‘tranches’ will be used to cost-average into the market weeks or months after you buy your first ‘tranche’ – or when the markets suddenly correct. You usually want a correction of 3-5% or more to buy – but sometimes you have to take whatever you can get.

In future weeks or months – or in corrections – continue to use your ‘tranches’ to buy into the markets. Buy Bonds with your second tranche, Alternatives and Gold/Silver ETFs with your third and so on. When finished with the whole cycle, repeat until you are fully invested.

This is not the only way to fund a portfolio – just a suggestion. If the market experiences a more severe correction, you may want to use that as an opportunity to go ‘all in’ or at least to use most of your tranches. It is up to you.

**For a somewhat similar portfolio allocation and risk model as the above, but with different and more traditional ETF choices, see the Merrill Lynch Edge Select Portfolio. Also see the Betterment Robo Advisor 50 Portfolio. These portfolios have about 10 line items, are well diversified and have more traditional ETF choices.

Conclusion

The emerging ‘Perfect Storm’ portfolio above uses non-traditional and potentially higher risk ETF choices like ARKK, EEM, PIO and IGF to pump up return and take advantage of future innovation and where funds might run in a normal type of crisis, similar to the GFC. We call this ‘Building The Perfect Storm’ portfolio because it is foundational in design and in the future will be converted to a fully executed portfolio that will withstand a perfect storm. That said, this basic design will need to be ‘tweaked’ if conditions indicate an imminent perfect storm.

For a genuine, sustained crisis of the type like a hyperinflation, similar to the current crisis in Venezuela – which we don’t expect for some time in the US (see the link on hyperinflation in the US, above) –  this portfolio will need to be modified some over time. For that, we will need to build bridges to a fully executed ‘Perfect Storm’ portfolio. We will address these ‘bridges’ and how to build them in Part 2. Then we will present a fully executed ‘Perfect Storm’ portfolio in Part 3.

Remember, this portfolio is meant to be held – only added to, not withdrawn from – for a minimum period of three to five years. Managing it yourself through a brokerage account will allow you to save the 1% to 2% per year investment fee that most financial advisors will charge. This charge is in addition to the additional and ‘hidden’ fees that brokerages charge for administration and trading and that funds charge to manage their particular fund (called expense ratios for ETFs).

No portfolio can protect you absolutely from market forces or Black Swans like the Great Financial Crisis (GFC) of 2008-09. However, the GFC was a once every 100 years type of event. Sage investment advice is ‘Never invest for a lifetime based on a once in a lifetime event.’ However, we live in unique and some would say, perilous times. It is good to be as prepared as possible for any eventuality.

That said, count on the fact that as soon as you start buying allocations the markets will go down – it always seems to work that way. This is why in the current environment cost averaging into the market over several months, at a minimum, may be the best strategy.

Investing is a little like American baseball, where a superstar gets a hit only three times out of ten at-bats. In investing we hope to get a hit six or seven times out of ten, and to limit our losses the other three or four times. If this portfolio accomplishes that returns should be substantial in up markets and limited in down markets and the investor will be well on their way to a global, diversified portfolio that protects and grows their savings.

Given everything, long term over 3-5 years this portfolio – along with its inherent flexibility and options – should protect you better than most and allow for ample growth in up markets.

 

Seaborn Hall, AIF, has a degree in management from Georgia Tech, a Master’s degree and has studied at the doctoral level. He was formerly a Regional Director at a national top-50 RIA; he currently manages a family investment company, writes, and publishes the Common Sense Interpretation Websites.

*Investments in which the investor is prepared to lose 100% of their investment.

Disclaimer: The author holds positions in all of the offerings in this model portfolio. This is an ongoing attempt at building a global, diversified portfolio that will weather a global ‘perfect storm.’ Check back with this page on at least a monthly basis. The author also has Coinbase and Kraken accounts and positions in Bitcoin, Ethereum, and Litecoin and other cryptos. This report should not be viewed as investment advice or a recommendation, but is for informational purposes only. Consult your own financial advisor for investment advice.

 

Terms To Know:

Rebalance or Re-balancing (of the portfolio) – selling/buying to adjust to target allocations on a quarterly basis

Cost-average – To divide your total investment into equal tranches bought periodically over a length of time, usually months or more

Tranche – a set allotment of a larger total amount to be invested; each ‘tranche’ will be cost-averaged over a set period until you are fully invested

ETF – exchange traded fund – like a mutual fund holds a group of stocks/bonds etc but traded daily on markets and accessible to retail investors

REIT – Real Estate Investment Trust – holds a diversified array of real estate depending on goals and portfolio restraints, accessible to retail investors and traded daily

GSCI – Goldman Sachs Commodity Index

EAFE – Euro Australia-Asia Far East

FTSE – Top 100 UK Stocks

Blockchain – the coded element and process that is the digital foundation of most cryptocurrencies

MLP – Master Limited Partnership, a type of ownership in oil and gas lines and other assets that usually produces a high rate of annual interest or return

Bitcoin, Ethereum – types of cryptocurrency that depend on digital, coded blockchain for their utility and use

Forex – foreign cash exchange used to hold and trade cash in foreign currencies

Hyperinflation – usually defined as an excessive, sustained rise in monetary inflation over 50% per month in the local currency; as a comparison, current ‘official’ inflation in the U.S. is slightly less than 2% per year

Expense ratio – the cost for managing a fund that an ETF’s fund managers charge on a quarterly or annual basis; it is automatically removed from your profits or assets and is therefore known as a ‘hidden fee’ even though it is shown on each ETF’s prospectus

Perfect storm – a confluence of global multiple crises in each of five different areas: Economic, Political, Religious, War, and Geo-Physical

Correction – when the stock market goes down due to various market forces or a crisis; corrections of 10% are normal every year while 20% corrections occur every 2-3 years