Have you ever wondered why some people never seem to be affected by stock market crashes? What do they know about the markets that you don’t know. Is there some secret formula that allows these investors to somehow become immune to market crashes? Well it might surprise you to know that is actually is a formula that mature investors know about that set them apart from everyone else out there constantly buying and selling trying to time the market.

Today I am going to help you answer a question that you might have always wanted to know but didn’t know who to ask… What is the safest portfolio, for surviving a market crash.

INTRODUCTION

Last week we tried to answer the most important question in the history of human existence, what’s the meaning of life… no, wait a minute; that wasn’t it; that was on my other channel. The question we asked here was this… what is the safest portfolio: well the safest medium risk edition.

If you haven’t watched that video yet, please go watch that video first and then come back and watch this one.

You’ll remember last week that we compared the Ray Dalio All-Weather Portfolio with Harry Browne’s Permanent Portfolio to try to determine which one was the best. Both portfolios matched up pretty closely but the All-Weather had a slightly better Sharpe ratio and produced slightly higher returns we gave the crown to the All-Weather.

Of all the medium risk portfolios why did I pick those two specific portfolios to compare? What makes those two portfolios special? There’s a simple answer to that question, I picked these two because of their performance during stock market crashes.

HONORABLE MENTIONS

Before we look at the data let me introduce you to our runners up which I left out of last week’s competition.

First up we have the Larry Swedroe’s black swan breaking portfolio appropriately named “The Larry Portfolio”

The Larry Portfolio is:

15% US Small Cap Value Stocks (IJS)
7.5% International Small Cap Value Stocks (DLS)
7.5% International Large Cap Emerging Markets Stocks (EEM)
70% Intermediate Term US Treasuries (IEI)

The theme of the Larry strategy is to prevent black swan events from creating sudden, unexpected losses from events that nobody could ever reasonably see coming.

Next up we have the Golden Butterfly. This strategy was created by the editors at PortfolioCharts.com and its goal is to create US Stock Market like returns with a much lower level of risk.

The golden butterfly is made up of:

20% US Small Cap Value Stocks (IJS)
20% US Large Cap stocks (VTI)
20% Short Term US Treasuries (SHY)
20% Long Term US Treasuries (TLT)
20% Gold (GLD)

2020 STOCK MARKET CRASH PERFORMANCE

Above is a chart of the performance of 18 popular portfolios during the month of February 19th 2020 thru March 20 2020. The stock market lost 30% of its value in just 22 days setting a record for the fastest decline in value in history. Over just a few weeks investors were having to deal with seeing their brokerage statements and retirement balances decline by hundreds of thousands of dollars. These are the kind of losses that usually takes years to unfold but we saw it happen in just 22 days!

Notice these four lonely portfolios at the back of the chart. Our buddies here, the Permanent Portfolio and the All Seasons held up strong losing just 7 and 8% respectively. Runners up Larry and the Butterfly lost just 8% and 14% respectively.

On the left hand side we see everyone’s favorite Total Stock Market portfolio, which most people know as The Simple Path to Wealth and the Ivy and Core Four portfolios. These portfolios got absolutely crushed.

Imagine having a million dollars in a mutual fund like VTSAX or VFIAX and over the course of 22 days you want the balance of this position drop to $667K. When you’ve already won the game, and you have already accumulated enough money to be financially independent why in the world would you take this kind of risk?

HISTORIC MARKET CRASH PERFORMANCE

You might be saying to yourself, 2020 was different. It was a true black swan that nobody could have seen coming. And maybe that’s true, but if we look at how these same portfolios performed over the last 50 years we see a common theme.

When we look at the year end returns going back to 1970 to determine the largest drawdowns we see that our 4 contenders for ‘what is the safest portfolio’ are right there holding up the rear flank again. The largest loss any of these portfolios have ever suffered is between 10% and 20% where as the Total Stock Market portfolio has lost close to 50% multiple times now.

CONCLUSION

Okay so what is the take away from today’s video? Well here’s my opinion on the matter. What if I told you that you could get a return of about 8% every year on average and if the market crashes the most you would be likely to lose would be between 10% and 20%?

Meanwhile the portfolio that the vast majority of DIY investors use will also get you around an 8% return but will also punish you with 50% losses multiple times during your investing career; what choice would you make?

It really should be a no-brainer here. Less risk for a lot more return is what Modern Portfolio Theory is all about and I hope you will stick around my channel for a while if you are interested in learning more about these kinds of topics!

RESOURCES

M1 Finance App
Organize Stocks into Pies!

Portfolios in this post

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Golden Butterfly VS. Larry Portfolio | Bear Proof Portfolios