“To increase your returns, you need to take more risk…”
—All mediocre money managers
Wall Street and academia tell you that to increase your returns, you need to add more risk.
They even have fancy terms for it: “modern portfolio theory” or “efficient market hypothesis.”
These theories claim that you can’t beat the market… Or that if you want to beat the market, you have to make riskier investments.
Wall Street uses these theories as a lame justification to put you into stock and bond funds. That makes it easier for them to manage more of your assets so they can take more of your money.
Today, we’re going to show you why you should ignore this voodoo theory…
Extra Benefit of the “Barbell Portfolio”
This past week, we introduced you to our barbell portfolio.
In a simple barbell strategy, you weight your portfolio with 50% stocks and 50% gold. That strategy beats both holding the S&P 500 and gold bullion separately.
In our elite barbell strategy, you load one side of your portfolio with 50% gold royalty companies and the other side with our Elite 25 companies. This strategy returns eight times more than typical buy-and-hold investments.
But here’s the thing…
Not only are you getting better returns with our strategy, but you’re also doing it with less risk.
That’s the holy grail of finance…
Reduce Risk by Limiting Your Drawdowns
Every portfolio has drawdowns. There’s no way to get around that. The key is to make them as short as possible. And that’s what our barbell portfolio does.
A drawdown is when a portfolio declines in value. There are two ways to measure drawdowns:
- The percentage your portfolio is down from its peak.
- The length of time your portfolio is below its previous peak.
Today, we’re going to focus on the second type of drawdown. (We discussed the first type of drawdown in Part 1 of this series.)
If you hold just stocks or gold separately, it’s common to have drawdowns that last up to six years. You can see that in the chart below.
Gold is currently in its sixth year of a drawdown… And it has a ways to go to set a new high. And as you can see, stocks have had long drawdowns, too.
That’s where the second benefit of the barbell portfolio comes in…
By creating a 50/50 portfolio of gold and stocks, you drastically decrease the length of drawdowns (see the chart below).
In a barbell portfolio, the longest drawdown over the past 20 years would have lasted only three years. That’s not so bad.
But you can reduce your drawdowns even further by using the elite barbell portfolio. Take a look at the chart below…
You can see this strategy had shorter drawdowns than the regular barbell portfolio or buying and holding gold and stocks separately.
That means your portfolio spends more time growing while containing risk.
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So don’t believe the myth that to get bigger returns, you need to take on more risk.
Bottom line: If you can’t afford a two- or three-year drawdown, then you shouldn’t invest in the market. You should have a savings account.
But if you want to beat the market, we believe the barbell strategy is one of the safest ways to do so. We challenge anyone to prove us otherwise.
Regards,
Nick Rokke, CFA
Analyst, The Palm Beach Daily
CHART WATCH
Commercial property is reaching bubble territory…
The Green Street Advisors U.S. Commercial Property Price Index measures the prices of apartments, office buildings, malls, and other commercial property.
The index has risen over 100% since it bottomed in 2009. It’s also 27% higher than the bubble peak in 2007.
Real estate is generally viewed as a stable asset. But this chart shows that’s far from the truth.
There are many reasons for the increase… But the biggest one is cheap money. If interest rates continue rising, look for real estate prices to tumble.
For those who own real estate investment trusts (REITs) for additional yield, pay close attention to interest rates and this index.
—Nick Rokke
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MARKET BRIEFS
Bitcoin Continues to Surge Higher: Bitcoin reached a three-year high on Wednesday, breaking above $1,120 per coin. Investors are piling into the cryptocurrency ahead of the Securities and Exchange Commission’s (SEC) decision on the Winklevoss Bitcoin Trust ETF, which would give investors the first-ever easy way to invest in bitcoin. The SEC is expected to make its final decision on the Winklevoss trust by March 11.
Even if the trust is denied, a Japanese law for bitcoin is set to take effect in April. That law could potentially lead to an influx of institutional money into bitcoin from that country.
Joining Elite Company: Germany’s most popular and largest financial news network and platform is listing bitcoin among other major reserve currencies such as the U.S. dollar, Japanese yen, and Chinese yuan on its “most important exchange rates” section. Finanzen.net is a key player within the German financial and media industries. Listing bitcoin on its exchange rates section implies that the company considers bitcoin one of the most important currencies in the world.
On the Radar: Our thesis on bitcoin remains unchanged. If you own bitcoin, continue to hold it. It’s still the gold standard for cryptocurrencies. Meanwhile, look for more exciting cryptocurrency news from Palm Beach Confidential editor Teeka Tiwari. Teeka has been researching some potentially game-changing blockchain technologies and the best way to get in on them.
No one in the industry knows more about blockchain and cryptocurrency technology than Teeka and his team. Stay tuned…
If you have a question about blockchain/cryptocurrency technology for Teeka, click here.
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MAILBAG
Editor’s Note: We asked if you’re in favor of the Trump administration’s proposed border wall. And the Palm Beach community responded…
From Michael C.: One look at what’s happening in Europe—and the desires of the anarchist left in this country—tells you, of course, the answer is yes, the wall is worth it. The wall isn’t that difficult to pay for, really. Divert all U.S. funds that are sent to support terrorist-sponsoring nations… and use that. Bring U.S. troops home and, BINGO, you have a force to secure the border.
From John H.: We don’t need to build a wall. Simply end the welfare state… and start punishing rapists and murderers. Then the only Mexicans who will come to America will be Mexicans we’d all love to have as neighbors.
From Scotty J.: I’m absolutely with President Trump. I’m 100% behind building a wall on the Mexican border. I don’t care how much it costs. Mexico has cost the USA big time. It is time to wean them off the American nipple.
From Bryan T.: Pertaining to the issue of a wall on the border… It’s the same principle as having doors on your house. Would you want just anybody to wander into your house? No, of course not. Because there are those who would enter with the intent to do you harm. And so it should be with our country.
From Paul P.: You asked if building a “wall” is worth it. Do a calculation on the current and long-term costs of all the drug addictions, gang crimes, potential terrorist attacks, welfare costs… and then you can easily answer that question.