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With the buying and holding of stock index ETFs becoming seen as the holy grail of investing by everyone from Warren Buffett to young financial planners in this post, we’ll look at the alternatives. Many young investors now believe that the index actually guarantees an annual return of +8% over most 10- and 20-year periods. The problem with this is that it still depends on the timing of the buy-and-hold period as well as how the investments are entered. All at once is much different than the average dollar cost. Also if you reached the peak of your investing years and were ready to retire in 1982, 2000, or 2009, you had a very stressful event to go through. The path to these returns is being ignored in the belief that markets will always rebound as quickly as they have been since the bottom in 2009.
Lessons from stock market history are being ignored, even as the recent history of the 2008-2009 crash from March 2009 lows wiped out all S&P 500 index returns since 1997. Or pandemic lows in early 2020 wiped out all gains Trump era in a few weeks. Another example is the fixed returns in the stock market from 1929 to 1954. The key point is that there are lost decades and even 25-year periods that do not yield fixed gains. Most of the stock market’s gains over the past 25 years are a direct result of central bank and government intervention. The US is also characterized by the performance of its stock indices and markets where new innovative companies and new winners are constantly emerging, which is not true in every stock market around the world. Ten or fifteen years of stock market gains can be taken from an investor who buys and holds for months and may or may not come back. When the stock market is overpriced for future earnings, it can underperform investors’ expectations for many years.
An alternative to the buy-and-hold portfolio is a 60/40 Equity/Bond portfolio that focuses on defending and preserving capital through all market environments from bear markets, bull markets, volatility, crashes and high inflation. Designed by Chris Cole, hedge fund manager and financial historian dragon wallet It was created to be able to go through any kind of economic cycle and maintain wealth and purchasing power through diversification. Dragon Portfolio looks at financial markets from the point of view of a hundred years of history and takes into account the performance of all asset classes, not just modern portfolio theory.
Retail investors are currently advised to have little or no exposure to defensive asset classes, and Cole disagrees and believes that defensive assets should be at the core of portfolio holdings.
Offensive assets enjoy steady gains during long periods of economic stability and grow but ultimately incur large and rapid losses when there is a significant change in the market environment. These are stocks, bonds and real estate.
Defensive assets have small losses or poor performance during periods of market and economic stability. But they have massive gains in value during high market volatility, high inflation trends and market crashes. These are gold, long volatility positions, cryptocurrencies, and commodities.
Dragon Portfolio creates diversification with uncorrelated assets to facilitate returns on capital and hedge against significant risk in all market environments. This is the type of portfolio that would have done well during the 2008 crash but couldn’t be back-tested long ago as ETFs weren’t volatile at the time. This portfolio has generated solid returns with minimal withdrawals in the last five out of six years. You can see the full results of the Dragon Chamber backtesting below compared to the 60/40 benchmark which is designed to keep up with returns while still having lower risk of accidents. It performs best in high volatility, high inflation, high interest rate environments and poorly in stock market bubbles.
Here is the creation of the Dragon Wallet using ETFs:
Stock exposure at 24%: Vanguard Total Stock Market ETF $VTI
21% Long-Term Volatility: Profit from increases in expected S&P 500 volatility, as measured by VIX futures prices in US dollars VIXM
19% gold: the central gold fund, which owns the US dollar gold bullion
18% off commodities: PowerShares DB Commodity Index Tracking Fund $DBC
18% Long-Term Government Bond: iShares Barclays + 20 Year US Treasury ETF $TLT