2 ways to build a crisis-proof portfolio with ETFs


One reason why many people don’t invest in stocks is the fear of losses. It is directly linked to the possible high fluctuations in individual stocks and funds. Historically, stocks have generated the highest returns among all asset classes, but only those who have suffered setbacks of up to 83.4% in the meantime were actually able to achieve them for themselves.

Big setbacks are difficult to cope with for most people. In addition, it usually took years before the old stands were reached again. So what can ETF investors do to mitigate these slumps and still benefit from stock market returns.

Ray Dalio and Havard University are leading the way

Ray Dalio became known for his investment company Bridgewater Associates, which he founded in 1975. Today, it manages approximately $ 138 billion (as of April 2020) and Ray Dalio is one of the richest people in the world at $ 18.7 billion (as of February 2020).

His secret of success is the best-known of all investment rules, which is however seldom observed: diversification. Ray Dalio discovered the so-called all-weather portfolio, which should assert itself in all market phases. The investments are spread over shares, bonds, currencies and commodities, for example, in such a way that a good performance is achieved, but at the same time the volatility of the portfolio also drops significantly.

Many elite universities that manage their own capital do the same. For example, Harvard University has achieved an average return of around 11% since 1974, but very rarely suffered setbacks.

Possibilities of custody account distribution

1) 50-50-Portfolio

The best known is certainly the 50-50 portfolio. It is made up of 50% stocks and 50% bonds. It was made famous by the inventor of the index fund (John Bogle). Investors can make the most of it if they use different equity indices within the equity component and also different types of bond ETFs in the bond component.

If you structure your portfolio in this way, you can significantly reduce fluctuations. Tested since 1926, the weakest year was around -22.5%. The average return, however, was 8.2%. This results in a better return fluctuation profile compared to a deposit with 100% shares.

2) The permanent portfolio

The permanent or all-weather portfolio goes back to Harry Browne and consists of 25% stocks, 25% short-term bonds, 25% long-term bonds and 25% gold. It has achieved an average return of around 8.42% since 1978, but with a much higher level of continuity than would have been possible with a single asset class.

If there were setbacks, they were only very moderate with a maximum of -12.62%. In addition, it took a maximum of 18 months for the capital curve to reach a new high again. Since 1978 it has seen only five negative years, with the worst (1981) being just -5.34%.

Investors do not need asset management to compile such a portfolio. All you have to do is select the relevant ETFs and realign the portfolio once a year. If you are still unsure, you can first create a sample depot, follow the development and then dare to start over time.

The post 2 ways to build a crisis-proof portfolio with ETFs appeared first on The Motley Fool Germany.

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