As you probably know, the markets have taken a beating this month…

The S&P 500 is off 8.4%. The Nasdaq is down 13.8%. And cryptos like bitcoin and Ethereum have fallen 21.8% and 33.7%, respectively.

This whipsaw action and volatility can make even the most experienced investors dizzy.

But regular readers know we’ve been through this ride before… And we’re covered – no matter where the market zigs or zags.

You see, at PBRG, we don’t base our investment strategy on short-term market moves, daily CNBC chatter, or random tweets.

Instead, we protect our portfolios by using asset allocation… stop losses… and position sizing.

Plus, we recommend more asset classes than anyone we know of in our industry. This diversification gives us plenty of upside opportunity. But it also provides more downside protection.

And if volatility continues, now’s a good time to check in on your portfolio’s health.

So today, I’ll share six criteria you should “stress-test” for… and show you an easy way to “gut check” your potential losses.

But first, let’s drill down on what’s going on…

Inflation and the Fed

Over the last year, inflation concerns have created fear in the markets. Everything from stocks to crypto has seen volatility.

It’s gotten so bad that the Fed has signaled a rate increase in March. It would be the first hike since December 2018. All to clamp down on the highest rate of U.S. inflation since 1982.

The Fed is moving us from “cheap money” to “expensive money.” And it’s causing investors to pull money from risky assets like crypto and high-growth stocks.

So, if you watched your portfolio tumble the last few weeks, you’re not alone.

This volatility is the new normal, affecting anyone with money in the market. With a new environment of higher inflation and potentially increased rates, we can expect market choppiness to continue for at least a few months.

That’s why we consistently recommend alternative assets that add diversification, which in turn, reduces overall portfolio volatility.

Proper asset diversification and allocation are key.

But if you’re still worried about your portfolio, here are six questions you should ask yourself…

Your Six-Step Portfolio Checklist

At PBRG, we’ve developed an investing plan to keep us grounded even in the most volatile markets. If you stick to it, you’ll be able to outperform the average investor and limit your losses.

So run your portfolio through the six-step checklist below. And you’ll be ready for anything the market throws at you…

  1. Is your portfolio diversified? Numerous studies show that asset allocation accounts for more than 90% of your investment returns. Greater diversification also results in lower risk. So, a good start is owning a mix of domestic and foreign stocks, bonds, commodities, real estate, and gold.

  2. Do you own true alternatives? Be comfortable with being uncomfortable. In other words, think outside the box. Get some exposure to “true” alternatives like collectibles, cryptos, private placements, and annuities. They’ll generate long-term outperformance while shielding your portfolio in the meantime.

  3. Do you have a rainy-day fund? Cash is often a forgotten asset class. But it gives you optionality. You never know what opportunities life might throw at you. Whatever they are, cash typically “meets the need” better than anything else. So, it’s crucial to hold some. We recommend allocating up to 10% to cash.

  4. What are your position sizes? Position sizing refers to the size of a position within your portfolio (the percentage or dollar amount of your investment). Our simple rule of thumb is: If a position gets stopped out of your portfolio, your maximum loss should be no more than 2.5–5% of your portfolio’s value.

  5. Do you use stop losses? Stop losses let you control how much you’re willing to lose. They eliminate emotion (an investor’s greatest enemy) from sell decisions. And they protect your investments from devastating losses.

  6. Do you have an allocation to safer stocks? Invest in companies with quality balance sheets, attractive valuations, solid earnings, and strong growth prospects.

We use this same stress test in our flagship advisory, The Palm Beach Letter. Since Daily editor Teeka Tiwari took over in 2016, the recommendations in our portfolio have achieved average returns of 519%.

In comparison, the S&P 500 has grown 126% over that same period.

So, our Palm Beach Letter portfolio has done 4x better than the S&P 500. And with about 20% less volatility.

This checklist has served us well in the past. And it’ll continue to do so going forward. We suggest you print it out and keep a copy handy.

After you do that, it’s time to “gut check” your potential losses.

How Much Is Too Much?

Since the end of World War II, the S&P 500 has experienced 11 bear markets (declines of at least 20%). The average loss has been about 34%.

So, to stress-test your portfolio, apply a 34% loss to your equity portion.

For example, say you have $100,000 of assets… and you allocate 50% to bonds and 50% to stocks. A 30% tumble in stocks means you’d lose $15,000 of your nest egg.

Or if that’s too hard to imagine, think back to how you fared in February–March of 2020 during the outbreak of the coronavirus. U.S. stock markets dropped almost 30–35% then, well into “official” bear market territory.

Now, it’s gut-check time.

  • Can you withstand a loss like that?

  • Will you be able to sleep at night?

  • Do you have time to recoup your losses?

If any of the answers are “no,” then you should revisit your asset allocation… and consider trimming some of your equity positions.

The truth is, no one knows where the market will move in the short term.

But as outlined, heightened volatility could carry on.

That’s why at PBRG, we don’t base our investment strategy on short-term market moves. We use a time-tested asset allocation model. And we stick to our plan.

If we experience an extended downturn, portfolio diversification, position-sizing, and stop losses will protect our portfolio.

And we use pullbacks to add positions on quality investments at cheaper prices.

So, we’ll have plenty of upside opportunity when the market bounces back.

(Remember, 11 bull markets followed each of the previous 11 bear markets. And all of them took the S&P 500 to new highs.)

If the negative newsfeed keeps you up at night, stress-test your portfolio now.

This way, you won’t panic if things get worse. Instead, you’ll be well-prepared for any bumps in the road.



Grant Wasylik
Analyst, Palm Beach Daily