Over the past six months, inflation concerns have created fear in the markets. Everything from stocks to crypto has seen volatility.

Since the start of the year, the S&P 500 is down 11.8% year to date, and the Nasdaq is down 17.3%. Cryptos like bitcoin and Ethereum have fallen 17.6% and 31%, respectively.

Inflation has gotten so bad, even major investment banks are predicting the Fed will raise rates six or seven times in 2022.

And the first bump is likely to come this month. It would be the first hike since December 2018. All to clamp down on the highest rate of U.S. inflation since 1982.

At the same time, we’ve seen Russia invade Ukraine and upend global markets.

Everything from precious metals to fertilizer to oil is rising in price… And even after significant losses on both sides, Russia has made clear that its invasion will continue.

It’s the kind of uncertainty that makes even the most experienced investors dizzy.

But regular readers know we’ve been through market moves like this before…

And we protect our portfolios by using strategies like asset allocation… stop losses… and position sizing.

So with global tensions prolonging the current bout of uncertainty, now’s a good time to check your portfolio’s health.

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

Your Six-Step Portfolio Checklist

At PBRG we recommend more asset classes (nine in total) than anyone we know of in our industry. This diversification gives us plenty of upside opportunity. But it also provides us with more downside protection.

[Our nine asset classes are equities, fixed income, real estate, cash, precious metals, private markets, bitcoin, altcoins, and collectibles.]

We routinely reevaluate our nine classes based on market conditions. And with sentiment shifting from positive to negative – we recommend you do so now.

If you want to make sure your portfolio survives the current bout of volatility, run it 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, bitcoin, 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, and private placements. 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.

  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%.

During that period, we saw several crashes, including:

  • 2018 Crypto Winter, when bitcoin and Ethereum dropped as much as 83% and 94%, respectively…

  • The December 2018 Fed Scare when the market plunged 20.2%…

  • The pandemic-related crash of March 2020 that saw the S&P 500 drop as much as 35.5%…

  • And the current market pullback, with the S&P down 5.6%.

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%.

(Keep in mind, though: Those 11 bear markets were followed by 11 bull markets. And each bull market took the S&P 500 to new highs.)

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 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 those losses?

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

So 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. And positioned to profit when the market eventually recovers.



Grant Wasylik
Analyst, Palm Beach Daily

P.S. Do you plan on using our stress test? And if so, what were your results? We’d love to hear your story. So send it to us right here