By Dr. David Eifrig, editor, Retirement Millionaire
When my business partners and I decided to create our Stansberry Portfolio Solutions service a few years back, we had one goal in mind: Give subscribers a one-stop shop where they can find a portfolio built around our best ideas.
So Steve and I got together with our company’s founder Porter Stansberry… And we decided to create three portfolios that covered anything subscribers could possibly need and want, based on what we would want if our roles were reversed.
It was an audacious plan…
We created The Capital Portfolio for folks – likely younger ones – who were looking for capital gains over a longer period of time.
The Income Portfolio was created for people who need to preserve capital and use it to generate high current and future income.
We topped these off with The Total Portfolio, which was designed to look across all of Stansberry Research’s newsletters and trading services… and blend our best ideas into a single portfolio that balances growth, value, and income ideas, along with market hedges that protect your principal during a downturn.
As of last year, we added a fourth portfolio to the mix… The Defensive Portfolio. It’s the “stay wealthy” counterpart to Capital’s “get wealthy” objective.
Stansberry Research had never done something like this before. As a group, we were nervous. As the “guru” of my own investment letter, it’s easy to decide what’s best.
But bringing great minds together to agree and allocate… that was going to be interesting.
What if we couldn’t do it? After all, as I’ll show you today, a portfolio isn’t just a collection of good businesses…
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A good portfolio requires matching your position size with your convictions. It requires deciding on specific goals – so far as risk and return goes – and sorting through thousands of potential investments to reach them.
For us, it was a new set of challenges.
For example, the stock market’s bull run is getting older and older. Many market metrics show valuations that textbooks and Nobel Prize-winning economists would have told you were unattainable.
As a result, Total’s cash position has at times exceeded 20% of the portfolio, and short positions have at times made up to 12%. Even Income has been holding 3%-7% in cash at times, looking for safe opportunities to generate income over the long term.
These decisions have consequences for our results…
Growing your wealth safely requires more layers than just picking different stocks. We had to beef up our firm’s position-tracking and analytics, add staff members to monitor every tick in the markets, and regularly convene our investment committee for long discussions about the allocations of winners and losers. For us, a percentage here and a percentage there makes a difference.
And so far… I think we’ve nailed it.
In 2019, the benchmark S&P 500 Index went up 31% annualized. Meanwhile, our portfolios have delivered annualized returns of 42% (Capital), 32.6% (Total), 27.3% (Income), and 20.3% (Defensive).
In other words, Total and Capital both surpassed the broader market. And Income and Defensive both did exceedingly well, despite holding substantial positions in cash and gold, fixed-income investments (for Income), and safe short-term government bonds (for Defensive).
Our audacious plan has turned out to be a good one. But don’t judge us by these returns alone. The true test will be what comes next… Our best performance is still ahead of us.
Anyone could have earned roughly 30% – or close to it – in an S&P 500 Index fund last year (including dividends). Earn that year after year, and you’re on your way to doubling your money every three years or so.
But to be frank… you won’t earn that most years. Most years won’t be anything like 2019. And most stretches of nearly a decade won’t come close to delivering the returns we’ve enjoyed since the market bottomed in March 2009.
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Those index returns are great when you can get them. But a reckoning is coming. It always does.
We don’t know when… but the stock market has 10%, 20%, and 30% drops in its future. That’s just what markets do.
In my view, you can’t – and shouldn’t try to – trade around reasonable declines. Taxes are the most obvious reason. After you pay capital-gains taxes, you’d have to trade a 20% correction exactly right to come out ahead. And no one gets it exactly right.
Instead, when the market correction does come, it will unveil the true strengths of the portfolios we’ve built.
As I said, The Total Portfolio has beaten the stock market. But it has done so while also holding a large amount of capital in short positions, cash, and even gold stocks. Those hedges will lose when the market keeps hitting new highs, but they’ll keep you safe when it declines.
And while this focus on risk management and capital preservation has sometimes muted our results… it will pay off in the long run.
I hope you’ve been putting this model to work in your own portfolio. Of course, this does mean it’s important to select high-quality businesses that deliver large gains and offset what you’ve set aside in conservative investments.
That’s what we’ve done in our Portfolio Solutions. We’ve been able to beat the market without feeling like we overextended ourselves into the hottest names. Our big gainers allow us to hold the safe positions and still ride the market higher.
But no matter what your personal investing approach is, the important thing is to sleep well at night knowing your portfolio can withstand a surprise drawdown.
So make sure you follow these three steps…
Pay attention to your position sizes and your aversion to risk (think losses and roller-coaster stock prices). Don’t be tempted to try timing the tops and bottoms… It’s statistically impossible.
Be sure you also think about cash, because at least 10% of the time over a three-year period, cash outperforms the other asset classes. Having some capital for bargain hunting when you need it most will also keep you from having to sell assets at precisely the wrong time (when the selling is overdone).
Finally, the old adage about letting profits run and cutting losses short has never been so critical in our investing lifetime.