You know the old saying, “don’t put all your eggs in one basket.”
It directly applies to your investment portfolio. And it’s where diversification comes into play.
Having a mix of stocks helps smooth out the volatility of any one investment. And it can help ensure that if one asset isn’t performing well, your other portfolio positions are still sailing smoothly.
If all your money is in one stock, and that stock goes bankrupt… You’re done.
But if that bankrupt stock is just 5% of your portfolio, you can still have great overall returns.
Say a position that’s 5% of your portfolio becomes a 10-bagger…
You’ll end up with a position that’s half the size of your starting portfolio in just one stock.
Because diversification lowers volatility, it also makes it much easier to stomach the market’s wilder moves.
A study by the CFA Institute in 2021 showed that having between 10–40 stocks can provide more than enough diversification.
Of course, you don’t just want to diversify the types of stocks you own. You also want to diversify over asset classes.
Wall Street has taken this concept and come up with a solution that, on paper, sounds like it works well.
I’m talking about the “60/40 portfolio.”
That simply means that 60% of total investments go into stocks… and 40% go into bonds. That gives diversification across asset classes as well as within asset classes.
When markets are rising, this portfolio can perform well. When stocks get really hot – as they did in 2020–21 – this mixed portfolio may lag a bit, but it still captures most of the upside.
And when stocks drop, the bond position acts as a cushion, leading to smaller losses.
However, as we saw in 2022, the 60/40 model is poorly designed to handle rapidly-rising interest rates. The repricing of stocks and bonds as rates soared at their fastest pace in decades took a big toll.
An all-stock portfolio would have sank 19% in 2022. As measured by the Bloomberg Global Aggregate Total Return Index, a bond portfolio would have dropped by 16%. A combined 60/40 model portfolio would’ve dropped about 17%.
Many see last year’s underperformance as an anomaly. After all, the last time the 60/40 portfolio mix had a losing year was 1932 – during the Great Depression.
Maybe it was an anomaly… But we don’t invest based on what’s in the rearview mirror. We’re forward-looking.
Plus, the data is clear: Individual investors tend to substantially lag the overall stock market.
That’s true even for those employing a more conservative investment approach like a 60/40 portfolio. As shown in the table above, the average investor lags the market by a whopping six percentage points over 30 years.
Looking at how individual investors underperform the market on average, we’re clearly doing something right with our long-term market-trouncing returns.
It’s also clear that any asset allocation model that overlooks cryptocurrencies and collectibles is doing investors a disservice.
That’s why we changed our recommended portfolio allocation mix last summer.
We now follow a 50/20/30 mix.
Here’s what that means…
Better Than 60/40
With our allocation mix, instead of 60% allocated to stocks, we allocate just 50%. Those include a mix of high-growth ideas and world-class income-growing dividend stocks.
We believe 50% works better than 60% in this market because investors tend to get too hung up on the long-term potential of stocks.
And having such a high starting allocation to stocks at 60% leaves less capital for Maverick Investments that can provide the best asymmetric returns.
Now, last year’s big market selloff hit our stock portfolio hard, and we underperformed the market in that respect.
But with the long-term power of income growth stocks and investments in growth markets, we expect to again come out ahead of the market in 2023.
Instead of 40% bonds, we have 20% allocated to fixed income.
Fixed income includes real estate and government I-bonds, where we locked in record-high yields last year.
We allocate 20% to these because we want steady returns from bonds, real estate, and other income-focused investments.
But we can also get growing income from dividend stocks, so we don’t need a huge allocation to pure income plays. Plus, we still need room in our portfolio for market-beating Maverick Investments.
With interest rates at their highest levels in 15 years and the rate of inflation decreasing, we see more opportunities in the bond market over the coming months.
The other 30% is our “secret sauce.” We call these our Maverick Investments. This is where our market-beating potential really comes into play…
Going Against the Herd to Beat the Herd
Maverick Investments are like Tom Cruise’s character from Top Gun.
In Top Gun, Maverick is a guy who goes his own way.
He’s free-thinking. He doesn’t follow the crowd. And because of that, he’s successful.
That’s exactly the mindset you need to survive this New Order of Money… But you won’t find maverick ideas on Wall Street.
So we need to look for Maverick Investments outside the standard 60/40 model of equities and bonds.
Three crucial characteristics define a Maverick Investment…
They’re Real. These are generally (but not always) tangible assets like art and real estate or intangibles like bitcoin and music royalties.
They’re Rare. These are assets with low supply.
They’re Enduringly desirable. These are assets with a track record of having high demand from wealthy people.
Last year, we incorporated Maverick Investments in our portfolio to prepare for the New Order of Money.
That’s why we have 30% of our total portfolio allocated to collectibles, cryptos, and private deals. The beauty of these assets is that they provide asymmetric returns.
That means their upside is much higher than their downside. So you don’t need to bet a lot to make a lot on these Maverick assets.
(For Maverick Investments, we generally recommend position sizes of $200–500 for smaller investors and $500–1,000 for larger investors.)
Even in a down market, Maverick Investments like crypto and collectibles continue to make strides:
Despite crypto prices seeing a massive drop in 2022, the bitcoin network grew its hash rate to a record high. Institutional interest has exploded, and the first crypto plans approved for 401(k) use went live.
Ethereum completed its Merge, shifting from proof-of-work to proof-of-stake. And the crypto has seen a few days where more tokens are burned in fees than are created… That’s creating a potentially deflationary crypto that could help fuel its next move higher.
In the collectibles market, a game-worn Diego Maradona jersey worn during the “Hand of God” goal at the 1986 World Cup set a record $9.3 million last year.
We wrote more about these recent strides in our December 2022 Palm Beach Letter. (Paid-up subscribers can read that issue here.)
Of course, Maverick Investing isn’t just about owning assets that can make big returns. It’s about managing risk.
As I mentioned, you don’t need to bet the farm on them. Take bitcoin, for example.
Daily editor Teeka Tiwari recommended it at $428 in 2016. Since then, it’s up 4,339%. That’s enough to turn $1,000 into $43,390… And that includes holding bitcoin through two brutal Crypto Winters with drawdowns of over 75%.
That’s the power of Maverick Investing.
Our asset allocation model allows us to take advantage of the asymmetric returns on Maverick Investments. So we’re entering 2023, ready to beat the market’s return once again.
Analyst, Palm Beach Daily
P.S. As I explained above, if you want to beat the market in 2023 you need to own some Maverick Investments…
And one particular Maverick Investment has outperformed all of Teeka’s traditional investments combined over the last two years.
To learn how you can get started in this inflation-proof, volatility-resistant asset for as little as $50… and also unlock access to all of our Maverick Investment research at the Palm Beach Letter… click here.