Dylan Grice suggests the Cockroach Portfolio: 25% cash; 25% government bonds; 25% equities; and 25% gold. What we can learn from the cockroach
Government bonds protect against deflation (provided your money’s invested in solid government bonds and not trash). Equities offer capital growth and income. And gold, as we know, protects against currency depreciation, inflation, and financial collapse. It’s vitally important to maintain holdings in each, in my opinion.
The beauty of a ‘static’ allocation across these four asset classes is that it removes emotion from the investment process.
I don’t really agree with this but I think it is an interesting read. And I do agree the standard stock/bond/cash portfolio model is not good enough.
I would rather own real estate than gold. I doubt I would ever have more than 5% gold and only would suggest that if someone was really rich (so had money to put everywhere). Even then I imagine I would balance it with investments in other commodities.
One of the many problems with “stock” allocations is that doesn’t tell you enough. I think global exposure is wise (to some extent S&P 500 does this as many of those companies have huge international exposure – still I would go beyond that). Also I would be willing to take some stock in commodities type companies (oil and gas, mining, real estate, forests…) as a different bucket than “stocks” even though they are stocks.
And given the super low interest rates I see dividend paying stocks as an alternative to bonds.
The Cockroach Portfolio does suggest only government bonds (and is meant for the USA where those bonds are fairly sensible I think) but in the age of the internet many of my readers are global. It may well not make sense to have a huge portion of your portfolio in many countries bonds. And outside the USA I wouldn’t have such a large portion in USA bonds. And they don’t address the average maturity (at least in this article) – I would avoid longer maturities given the super low rates now. If rates were higher I would get some long term bonds.
View of Glacier National Park, from Bears Hump Trail in Waterton International Peace Park in Canada, by John Hunter
These adjustments mean I don’t have as simple a suggestion as the cockroach portfolio. But I think that is sensible. There is no one portfolio that makes sense. What portfolio is wise depends on many things.
I think something along the lines of this would make sense today for someone living in the USA (but I would vary it a fair bit depending on the person’s situation and it would change in different market conditions)
- 35% Total Stock Market Index Fund (VTSMX)
- 15% Total International Stock Index Fund (VGTSX)
- 10% Vanguard emerging markets fund (VWO), or something similar
- 20% high quality “dividend aristocrat” type stocks
- 10% REIT Index Fund (VGSIX) or direct real estate ownership
- 5% bonds
- 5% cash
I would likely go a bit higher for real estate with direct ownership. As the portfolio was approaching the time withdrawals would be made (retirement) I would want real estate investments to be substantially cash flow positive (and leverage to be limited – hopefully under 50%). I would like primary residence to be without a mortgage or with a very small mortgage.
If I was drawing substantial income from the portfolio I would likely increase cash to at least 3 years of projected need (though even this gets a bit fuzzy as adjusting for expected interest and dividends makes sense to me).
I’m willing to include dividend stocks that don’t meet the dividend aristocrat rules but are similar: (ABBV, INTC even AAPL). I would consider including a bit in pipeline MLPs such as OKS (higher current yields but likely less growth).
Related: Lazy Golfer Portfolio Allocation – Sleep Well Fund Results – Retirement Savings Allocation for 2010 – How to Protect Your Financial Health
Comments
5 Comments so far
When I learned that Vanguard fund VTSMX has become the biggest fund, I tried to think through the implications by thought experiment: how would the market behave if more and more, eventually all, investors bought only the passive index fund.
It seems to me in the absence of market makers buying or selling particular stocks, this would freeze prices. Since individual stock prices wouldn’t appreciate, there would be no return except dividends. (There would be no more brokering industry, but forget that for the purpose of this discussion.)
Companies could only float stock offerings that promised dividend payments; this would kill the small-cap high-growth business model. Since something can’t grow from nothing (with the small exception of our cosmos,) the capital economy would be impossible.
Reductio ad absurdum. So a countervailing force to this disequilibrium: as more investors ignore fundamentals, stock picking becomes consistently profitable, which runs counter to the rationale for Vanguard-style passive index tracking. Active portfolio management gains the advantage.
Comments? Jeers? ‘Well duh?’
I don’t think the logic in the first couple of paragraph makes sense. Demand levels are not a matter of how that demand is brought the market. You state the demand won’t be there if people buy index funds instead of individual stocks – that makes no sense. The investors buying index funds, buy the underlying stocks.
I do think there is an interesting issue of what happens to the success of index investing versus stock picking as the market moves to more and more index driven investing. It does seem to me such a move may open more opportunity for successful stock picking.
Certainly at the edge cases of say 99% index investing with hardly any individual stock picking it would be a very odd market. I do not think it is possible to get to that type of level because it would be so odd.
The question is as you start approaching levels where the historical evidence breaks down, what happens? And at what level is that (20% index fund investing, 40%, 60%, 80%?). Even once you reach a point where stock picking provides significantly better returns theoretically there is the question of if people can actually exploit those opportunities successfully. My guess is they can but most will actually do the opposite and fail (they won’t beat the market by enough to cover the charges to cover salaries and expenses).
But we will see what happens. My guess is we will start seeing more evidence of stock picking being a successful strategy especially for individual investors that are sensible (where you avoid huge fees charged by financial institutions). And where investors follow advice from Ben Graham, Peter Lynch, etc..
Thanks; seeing past the muddle I feel a bit better now as an index investor.
[…] Cockroach Portfolio […]
[…] wise. If I gamble my entire retirement on one stock I may get rich. But even if that happened it wouldn’t make that a wise choice. To evaluate results you need to think more deeply than did the results prove it was wise or […]