Nike Cage, Mike Tyson, 50 Cent, and Kevin Bacon.

What do all these famous men have in common? What do they have that you don’t have? Well… other than fame, celebrity, and hordes of crazy, obsessed fans?

All these men have lost unimaginably large sums of money by making some truly terrible investment decisions.

Luckily for you, you have me and today I am gonna help you answer one of the most perplexing questions in the history of human existence. What is the safest portfolio —Medium Risk Edition

So finish that bowl of Wheaties and put your thinking caps on because you’re about to learn how you can create a lot of wealth without having to worry about losing it all overnight in a stock market crash.

INTRODUCTION

Portfolios are typically grouped into one of four categories:

• Low Risk
• Medium Risk
• High Risk
• Very High Risk

Today we’re gonna go to the middle of the road and investigate which medium risk portfolio is the safest. By safest, we mean portfolios that beat inflation, produce reasonably high returns and generally produce those returns during any market cycle, not just the boom times where everyone buying stocks thinks they’re an investing genius.

In this video we’re gonna compare Ray Dalio’s Famous All-Weather Portfolio against Harry Browne’s Legendary Permanent Portfolio.

ALL-WEATHER PHILOSOPHY

First up we have the All-Weather Portfolio. All-Weather is purpose built to perform well in any market condition. It uses a strategy called Risk Parity

which just means that instead of deciding how much of your money goes in what asset class using a fixed percentage you decide how much money goes into each asset class based on how risky each asset class is.

This portfolio has:

• 30% stocks
• 40% long-term US treasuries
• 15% intermediate term treasuries
• 7.5% commodities
• 7.5% gold

That 55% bond allocation may seem unreasonably high at first glance but you need to understand that stocks are 3x times as risky as bonds and this portfolio is specifically designed to perform well in any market condition.

PERMANENT PORTFOLIO PHILOSOPHY

Next up is Harry Browne’s Permanent Portfolio. This portfolio is built to handle four specific economic conditions:

• Expansion
• Recession
• Inflation
• Deflation

The portfolio consists of 4 assets classes: stocks, long-term bonds, short-term bonds, and gold. Each asset class has an equal weighting of 25%.

The philosophy here is that when the economy is expanding stocks and bonds do well, during a recession short-term bonds and cash do well, during inflation gold does well, and during deflation long term bonds and cash perform the best.

PORTFOLIO COMPARISON

Risk Comparison

So how do these portfolios stack up in terms of risk? Turns out they are pretty close to each other. Standard deviation over the last 13 years is around 7%, which just means that each portfolio could move up or down by 7% or so in any given year. The Sharpe ratio gives a slight edge to the All-Weather but that could be measurement error.

The last time I investigated these portfolios the standard deviation was around 5% so both of these portfolios have increased slightly in-terms of volatility but are still way below the volatility of stock heavy portfolios.

Returns Comparison

The All-Weather got a higher overall return but just barely.

Both portfolios returned an average of just over 7% annual returns so that means this portfolio is doubling in value about every 10 years or so.

The worst year both portfolios suffered was 2015 when All-Weather lost 3.6% and Permenant Portfolio lost 3%

The worst draw-down either portfolio suffered was around 12%, which is pretty damn great.

Other Metrics

Before we reach a conclusion lets take a look at some metrics.

US Market coorelation is less than half a percent, which is ideal.

Both portfolios returned about 5% over the risk free return, also pretty good

The safe withdrawal rate is 10 and 11 % respectively. The perpetual rate was about 5% so we could have withdrawn $50,000 per year from a million dollar portfolio at the beginning of each year and not even worried about the previous years performance and not drawn down on the principle.

CONCLUSION

Okay so who wins today’s challenge of The Safest Medium Risk Portfolio? Its a hard choice but if it were me I’d choose Ray Dalio’s All Weather Portfolio. The Permanent Portfolio just had its best 100-day performance ever on the back of historic gold and stock appreciation. I think you can’t go wrong with either one of these portfolios, whichever you decide is best for you.

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