The end of 2023 has been baffling, economically. Over the last couple of months, the market took a severe beating, with the S&P 500 falling from over 4,500 points to finish October at just over 4,100 points.
This month, equities are back with a vengeance. The S&P 500 is up over 300 points in November already.
This out-of-the-blue comeback warrants a reassessment of where things are headed. Goldman Sachs strategists see the United States dodging a recession in the new year and instead posting modest gains through 2024, with the S&P 500 gaining just over 4% to end 2024 at 4,700.
The economy’s fate may be up in the air, but so is the country’s political future. Almost half of investors — 45% — believe the 2024 presidential election will have a more significant impact on their portfolios than market performance, according to a recent survey by the Nationwide Retirement Institute. Add to this a gloomy outlook for the global economy, with countries battling high-interest rates and renewed conflict in the Middle East and things get even more complex.
With so many variables going into the new year, it’s hard to get a read on what will happen. At these times, investors are best served by remembering how little they truly know about what can happen.
Author Nassim Taleb, the mind behind “Black Swan events,” tweeted in 2020: “The track record of economists in predicting events is monstrously bad. It is beyond simplification; it is like medieval medicine.”
Investors should consider some tried-and-true portfolios that act as defensive plays built to withstand destabilizing forces and make it through, no matter what occurs in the broader economy.
Weather Patterns
As its name suggests, the all-weather portfolio is a simple strategy with the potential to thrive in any condition: rain, hail, or shine.
The plan was conceived by Bridgewater Associates founder Ray Dalio as a way to create a portfolio that could always deliver some gains.
Bridgewater explains this passive strategy was the best way for Dalio and his associates to build a portfolio that didn’t require predicting what the stock market might do.
The allocation is: 30% total stock, 30% total stock market, 40% long-term U.S. bonds, 15% intermediate-term U.S. bonds, 7.5% diversified commodities, and 7.5% gold. The idea is that when one asset class underperforms, the others will rise, and vice versa.
The strength of the portfolio is that it keeps investors in the game. By allocating across asset classes, investors may develop an almost cockroach-like resistance to a financial apocalypse and survive while others get wiped out. If the portfolio holds true to its promise of consistent returns across all market cycles, it should always provide some shelter from the storm.
That’s the theory, but in practice, markets don’t always work that way.
Take 2022, which witnessed a historic collapse in both bonds and equities. These two asset classes typically offset one another. When prices for one go up, the other goes down. Yet this equity-bond see-saw snapped last year, and investors playing on either end of the equipment both fell hard on their backs.
This serves as a reminder that no portfolio is entirely immune to disruption by seemingly nonsensical market behavior. Last year’s retreat was particularly punishing for the classic 60-40 bond-stock portfolio, a favorite allocation split of the newly retired.
While cash isn’t part of the famous four-part allocation, Dalio says, in current conditions, it’s worth holding on to some paper, thanks to high interest rates. This is a turnaround for him. The hedge fund titan said “cash is trash” back in 2020. So, as long as banks continue to reward depositors with especially high yields, cash may be solid through 2024.
Golden Butterfly
Following in the footsteps of Dalio’s strategy is another highly resistant portfolio: the so-called Golden Butterfly portfolio. Tyler of Portfolio Charts is a mechanical engineer and technical trader whose site analyzes market charts, created this investment methodology. The Golden Butterfly method prizes consistent growth by striking a balance between economic conditions and prosperity.
The Golden Butterfly allocation is: 20% total stock market, 20% small cap value, 20% long-term bonds, 20% short-term bonds, and 20% gold. How does it compare to its predecessor?
In a cross-comparison of a hypothetical $10,000 initial investment over 10 years concluding in 2022, the Golden Butterfly outstripped the all-weather portfolio by about 10 percentage points. Those results aren’t guaranteed over the next 10 years, however.
Overall, this portfolio may best suit investors who like the logic of the all-weather portfolio but want greater exposure to gold and less to bonds.
Have it Three Ways?
As the name suggests, a 3 Fund Portfolio has just three funds. It’s as simple as picking three things and never worrying about them. The 3 Fund Portfolio makes investing simple.
A fund can be any mutual fund or index fund. Investors can even use ETFs to create a 3 Fund Portfolio. Investors set up the allocations and let them do the work as they continue to invest.
A 3 Fund Portfolio typically consists of U.S. stocks, U.S. bonds, and international stocks.
This disarmingly simple strategy became a favorite among “Bogleheads” — followers of John Bogle, the founder of Vanguard and godfather of passive investing who kicked off the index fund revolution in the 1970s.
Its geographic and asset class diversification and its inherent simplicity make the portfolio a simple choice. Investors can adjust the allocation according to their preferences. Conveniently, many major retail-facing investment management firms, like Fidelity and Charles Schwab, have specific funds that align precisely with the target assets, meaning it is easy for investors to enact this strategy with a single account.
The end of the year is an ideal time for investors to take stock of their positions, trim a few companies from their portfolio to tax-loss harvesting, and set goals for the new year. Either the portfolios listed above or other strategies may help investors survive whatever comes in the new year and enjoy the ride when the market thrives.
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