One hundred fifty years of financial data show that a combination of globally diversified equities and bonds accumulate wealth regardless of the environment despite short-term drawdown potential. An evidence-based approach leads to a core portfolio, which consists of a 60/40 combination between equities and short-term debt securities. The globally diversified equity component acts as the primary performance driver. The addition of globally diversified high-quality debt instruments mitigates the risk of global turmoil. The portfolio is rebalanced to equal sub-component weights annually. It is simple to implement, low maintenance, and generated attractive returns independently of manager skills.
The fixed-income portfolio aims to reduce overall portfolio volatility. This is achieved by global diversification among borrowers that are unlikely to encounter debt-related problems. Long-term evidence shows that governments with fiscal surpluses, low debt levels, long-term borrowing, and few hidden off-balance items were typically perceived as a safe haven. The debt of 15-20 financially sound borrowers can stabilize portfolios during global turbulence.
Precious metals are not a buy-and-hold substitute to global equities from an evidence-based investment perspective. An efficient long-term equity and bond portfolio can be structured semi-passively. Including a larger passive precious metals component does not add value to that portfolio. Instead, market timing matters significantly for gold and its siblings. Therefore, precious metals are more appropriate for trading secular trends with a bullish bias and not as a buy-and-hold investment.
The table below shows an approximation of a 60/40 equities and bonds core portfolio during the two most severe global events of the past century. For simplicity, we assume that the bonds have a short duration and were held to maturity. The stress test reveals that a portfolio consisting of global stocks and bonds would have recovered a maximum loss of 40% during the Great Depression within 7.5 years. Roughly 5.5 years would have taken to recover a loss during the Global Financial Crisis in 2007 to pre-crisis levels. The benefits of a portfolio mix between stocks and bonds become quickly apparent as the mixed asset-class portfolio not only experiences smaller losses. Most importantly, it also recovers faster and preserved liquidity to maneuver through difficult times.
|Portfolio||Long-Term Yield||Maximum Loss||Years To Recover||Event|
|100% Global Equities||8.50%||66%||13.5||Great Depression 1929|
|60% Equities/ 40% Bonds||6.90%||40%||7.5||Great Depression 1929|
|100% Global Equities||8.50%||50%||8.5||GFC 2007|
|60% Equities/ 40% Bonds||6.90%||30%||5.5||GFC 2007|
A standalone version of the core portfolio is the best solution for the vast majority of long-term investors. There is no plausible evidence that the global economic environment changed. Therefore, expecting a robust long-term return of roughly 7% after cost is reasonable. Put differently, investors do not have to fear global crises and can expect their invested capital to double every eleven years long-term. The table below shows a highly simplified example of a globally diversified model portfolio. It consists of 20 ETFs and 20 bond issuers.
|60%||Global Equities||40%||Global Bonds|
|GXF||EWP||EWL||EPOL||Czech Republic||Denmark||New Zealand||Taiwan|