The “Stay Rich” Portfolio

LOS ANGELES—Most people come to Los Angeles to see stars like Will Smith, Brad Pitt, and LeBron James. But I’m not in Tinseltown to stroll down the Hollywood Walk of Fame or watch the Lakers play bad basketball.

I’m here to meet one of the brightest minds in the investment industry: Meb Faber.

Meb is a true superstar in the investment research world. You might not have heard of him—because he doesn’t make bold predictions about which stocks will go up by hundreds or thousands of percent.

Instead, his specialty is creating portfolios that consistently beat the market over time with less risk. And his benchmark is to outperform the traditional 60/40 portfolio recommended by most wealth advisors. (A 60/40 portfolio is made up of 60% stocks and 40% bonds.)

He’s perhaps most well-known for creating the Trinity Portfolio, which buys countries with cheap stock markets that have started an uptrend. If you’d followed it from 1973 to 2015, you would’ve beaten the S&P 500 by 4.2% per year.

Over that same span, the traditional 60/40 portfolio would’ve turned an initial $1,000 investment into $49,410. Not bad… But if you’d followed the Trinity Portfolio, you would’ve turned that same $1,000 into $254,930—with much less risk.

That’s why I traveled to LA to meet Meb… He’s created a “stay rich” portfolio that will not only protect your wealth, but grow your savings as well. And if you’re looking to build a dignified retirement for yourself, its strategy is one you should consider following…

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Diversifying Assets

Meb’s new portfolio uses a strategy familiar to Daily readers: asset allocation.

Asset allocation divides a portfolio into multiple asset classes and invests in each one. When done correctly over time, proper asset allocation will increase your returns and reduce your overall risk.

As Palm Beach Letter editor Teeka Tiwari says, “Understanding this concept and putting it in practice will put you ahead of 90% of your fellow investors.”

And our approach is different from that of traditional financial planners, who generally recommended that clients divide their portfolios between 60% equities and 40% bonds.

Now, this has been a convenient and easy way to save for retirement—and it’s worked for years. But the 60/40 split no longer cuts it in today’s market environment.

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A bear market could cut your stock portfolio in half… And depending on when it occurs, you may not have time to rebuild it. Plus, with interest rates historically low (and likely to remain that way for the foreseeable future), you can’t rely on bonds to generate the type of income you’ll need in retirement.

So Teeka recommends a mixture of U.S. equities, foreign equities, bonds/cash, natural resources, gold, real estate, and venture capital, among other assets. He also sets aside a small percentage of the portfolio for smart speculations like cryptocurrencies and small-cap stocks.

And like us, Meb believes the traditional 60/40 approach doesn’t work anymore—especially for people currently trying to build their retirement nest eggs. In fact, in the 1970s, that type of portfolio would’ve lost 54% of your wealth.

But it’s not just a mix of stocks and bonds that can lose money… All assets go through bear markets. (Remember the real estate bust in 2008?)

As Meb told me, “It’s a hard pill for many to swallow, but nearly every single asset class will likely decline by 30% on a real basis—and probably more—in your lifetime.”

That’s why it’s important to have a diversified portfolio… so your wealth won’t be overexposed to any single asset class.

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The Portfolio

The trick to keeping your wealth is to diversify into “uncorrelated assets.” All that means is, you should buy assets that don’t move in lockstep with each other.

Now, Meb has crunched the numbers on almost every possible combination of assets you can think of to find the best uncorrelated mix. And he says the one with the lowest risk-adjusted returns allocates two-thirds to his Global Market Portfolio and one-third to cash.

The max drawdown for this portfolio is 37%. And while that would be painful, as mentioned, the 60/40 mix has had drawdowns as high as 54% in the ’70s. Even “safe-haven” Treasury bills lost 49% during that time.

Plus, the “stay rich” portfolio earns a 3.2% real return (or about 6% when excluding inflation). Compounded over 40 years, it would turn a $10,000 portfolio into $102,000. That’s a pretty good return for your safe money.

Here’s a breakdown of his portfolio:

And the table below compares the risk/return of the “stay rich” portfolio to that of traditional safe investments, such as cash and T-bills. (Remember, these are real returns, which account for inflation. In nominal terms, the “stay rich” portfolio’s return would be just over 6%.)

If you want to track this portfolio, consider the Cambria Global Asset Allocation ETF (GAA). It contains a similar mix of assets. As always, do your homework before making any investment decisions.

Remember: There’s no way to eliminate all investment risk. The best you can do is minimize it. But when you can get higher returns with less risk, you should take it.

Regards,

Nick Rokke
Analyst, The Palm Beach Daily

P.S. Subscribers to The Palm Beach Letter can get the full breakdown of our 2019 asset allocation guide right here. Meanwhile, let us know how you’re diversifying your assets right here.

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