Strangely enough, people seem to end up at one extreme or another with their investments. The particularly polarized portfolios may contain, on the one hand, all gold, silver and cash investments … or at the other end of the spectrum, all hand-picked, single-company tactical stocks (and maybe a few bonds for balance). The first could be great in an end-of-world situation, and the latter works well when the economy is booming, but both can fail somewhere in between. However, either strategy is better than spending everything and not saving a dime along the way!
In the middle, somewhere, lies a more sensible approach to asset allocation and investing for most people – a strategy (or set of them) that covers both the short and long term: a strategic mix of stock and bond funds combined with a commodities fund and perhaps a small physical holding of precious metals. Like any investment plan, the key is to consider all cases using a combination of history, theory, personal goals and risk tolerance. An ideal portfolio should suit individual needs and goals, involving risk only where there is potential reward.
Main Holdings – Index Funds with Stocks & Bonds for the Core: time and time again, people try timing the market … only to lose large sums of money they cannot afford to part with. Study after study shows that, by and large, active investing (including: buying funds that are actively managed) just does not pay off when you consider unpredictability, judgement error, market swings, expenses and taxes. Broad-index investing is typically much safer – particularly using a combination of less-correlated assets with growth potential and varying degrees of risk.
- But aren’t stocks a better bet for long-term growth? Stocks may be slated to grow faster, but bonds are slow-and-steady elements that can balance out the high ups and deep downs of the market … for long periods, bonds can beat out stocks by a hefty margin, as the last decade has shown. Not sure where to start? Go ahead and …
- Shoot for a so-called ‘lazy portfolio‘ or simple indexing strategy. These two asset categories (bonds and equities) are also good broad coverage for ‘short term’ disasters – while equities (stocks and stock funds) could drop due to economic downturn or global emergency, fixed-income elements (bonds and bond funds) should hold their own … at least assuming the government does not default. Plus an easy few-fund portfolio is easy to buy and hold instead of tempting you tinker with every momentary market shift.
- Consider going global in stocks and/or bonds: if a disaster is localized in one area (city, state or country) the regional or national stocks and bonds could suffer, so international diversification is a smart play for people with even a remote concern about site-specific emergencies. There are risks with going abroad to buy (currency-related and otherwise) but staying too much at home puts a lot of eggs in one basket, too.
Diversification – the Secondary Role of Sectors, Real Estate & Commodities: many would argue that commodities, real estate and other specific sectors are in some kind of a bubble, but predicting the future is tough and people tend to overemphasize what has done well in the past. As such, it is probably best to consider these kinds of investments secondary in most cases, though, of course, arable farmland and physical goods could come in extremely handy during economic emergencies or outright disasters.
- Buy real estate for yourself first, investment second: as the old argument goes, we all need a roof over our heads … consider real estate first and foremost as meeting a basic survival need for shelter. That said, homes and other properties tend to keep up with inflation over the long haul (short-term credit crises aside) and thus also make for a long-term inflation hedge.
- Sector betting is just what it sounds like – a gamble: there may be a case to be made for investing in under-performing sectors, but buying into an outperforming means counting on momentum when many investments, in reality, revert to a mean over time. In other words: you may be buying expensive shares that, in the cyclical course of the economy, will devalue again as other sectors rise.
- Gold, precious metals and physical goods: here is where it gets tricky. Storing gold, silver and especially heavy-weight metals like copper is burdensome to say the least, but investing in ETFs or other once-removed paper holdings may not provide the sense of security you are looking for. History seems to show a real benefit to holding a small amount of these assets for diversification purposes, but too much could put you at other kinds of risk for short-term and direct losses, while also adding tax headaches if and when they need to be sold.
The number one investment killer – worse than long-term inflation or short-term equity bubbles – is often the investor. Say what? Yes, the biggest loss potential in most portfolios comes from not staying the course – selling low out of fear and buying high out of greed. Ultimately, the best investment advice anyone can give you is quite simple: do the research, know your aspirations (as well as your limitations) and invest in something(s) that will allow you to sleep at night and perform well in various scenarios.
Thus, a final reading point for someone who is less concerned with capital appreciation and more concerned with capital preservation (return of investment over return on investment!): a Harry Browne-style permanent portfolio of (25% each) stocks, bonds, cash and gold. Why? History has shown that each of these assets “has its day” – recession, growth, deflation and inflation all have different impacts on these. The catch is that during periods of economic stability and success the cash and gold will essentially just sit around. However, during times of trouble they will also hold their value, and if the economy is suffering the bond holding may be doing well too.