Episode Details

A quick heads up before we come to today’s piece: I am taking my “lecture with funny bits” about gold to the West End for one night only. October 19th is the date. (That’s the show I did at the Edinburgh Fringe).

If you like gold, you will like this show. I promise. It’s super interesting. You can get tickets here. Hopefully, see you there.

So, continuing the recent theme of portfolio allocation, today we talk cockroaches …

I narrated a documentary once about cockroaches. Never mind the repulsion we may feel towards them, they really are the most amazing creatures. In fact, that repulsion may work in their favour because nobody wants anything to do with them, thereby bettering their chances of survival.  

Cockroaches have been around since before the dinosaurs. According to Wikipedia, they are some 320 million years old, having originated during the Carboniferous period. They are hardy as hell. They can survive and thrive in tropical heat or in freezing, sub-Arctic temperatures below minus one hundred degrees (Fahrenheit or Celsius). They can survive the dryness of the desert where there is no access to water, but they can also survive in and under water. Many cockroaches even survived the nuclear bombs dropped on Hiroshima in 1945 - they are known to be resistant to radiation. You can even cut off a cockroach’s head and it will live on, at least for a bit.

How nice to have a portfolio that is as hardy. We should all have something of the cockroach to our portfolios.

In the wake of the Global Financial Crisis back in 2009 I remember seeing a presentation by Marc Faber in which he described a portfolio for all economic weathers. It broke down as follows:

* 25% gold and cash. 

* 25% equities. 

* 25% bonds. 

* 25% real estate.  

Dylan Grice, who at the time was an analyst with SocGen, advocated something similar. He called it the Cockroach Portfolio, after that most hardy of creatures.

But the idea of a permanent, cockroach portfolio for all weathers was probably first popularised by an American investment advisor, Harry Browne, who died in 2006. Browne was also an author and politician. His books, mostly centred around investment, sold more than 2 million copies, and in 1996 and 2000 he was the Libertarian Party’s presidential nominee. 

But, as an investment advisor, in 1982 he developed what is known as “the permanent portfolio” investment strategy, which he then wrote about in his 1999 personal finance book, Fail-Safe Investing: Lifelong Financial Security in 30 Minutes. This portfolio would assure "you are financially safe, no matter what the future brings."

Browne’s idea was that there are four macroeconomic environments - four seasons if you like: inflation, deflation, growth and recession. One of those macroeconomic environments would always apply.

So his portfolio was allocated in such a way that some of it would perform well in each of those seasons.

* 25% in US stocks. That would do well in times of growth. 

* 25% in long-term U.S. Treasury bonds. These would also do well during times of growth - and in deflation too. 

* 25