Portfolio Playbooks: How the Greats Invest Their Money

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3:16Well, my fifth book, The Money School, launches today. Yay! As you know, if you've listened to yesterday's episode, my latest book is all about proven investing strategies to grow wealth. And so, to celebrate this week, I'm sharing some of those investing strategies here on the pod. In picking the first topic from my book, I landed on asset allocation pretty quickly because I think this is the cheat code we need right now. You may have seen the news last week that the Consumer Confidence Index fell by 7 points this month, making it the largest drop since August of 2021. Translation to that, people are getting nervous about a potential recession.

3:53And here's the thing, you don't have to panic just because the economy is. Even if you're skeptical about the macro economy, you can create confidence in your own little micro economy by taking the reins of your own investments. So today, I'm going to show you four asset allocation strategies designed to help you weather any financial environment. In other words, recipes for a portfolio that provides growth in good economic times and stability in tough economic times. Number one, the permanent portfolio. This is the brainchild of Harry Brown, politician and investment advisor in the 80s. The permanent portfolio is structured to withstand economic ups and downs by diversifying across four distinct asset classes.

4:3625 % in stocks for growth, 25 % in long-term government bonds for stability, 25 % in cash for quick moves, and 25 % in precious metals like gold as a hedge against inflation. This allocation is prepared for anything, no matter what the economic conditions are. One way to set this up would be snag a broad-based index for growth, government bonds, particularly long-term ones, for stability, a money market account for short-term treasury bills, ensuring that it's on hand when needed and still earning money for quick moves, and a gold ETF serving as a hedge against inflation and currency devaluation.

5:14Historically, the permanent portfolio has shown its strength in providing stable returns with lower volatility than more aggressive investment strategies. Its diversified approach has helped it stay relevant through many economic storms, from recessions to high inflation periods. This makes it a reliable option for investors seeking long-term growth, careful yet laid-back investing strategy that can handle any financial weather. When the stock market is up, it grabs that growth. When the stock market is down, the bonds are there to keep giving you returns. During inflationary times, gold will see its value go up, and if you need to rebalance, it's easy with cash on hand.

5:53Plus, the cash comes in handy when interest rates rise. This strategy is best suited for conservative investors looking to swipe right on the perfect portfolio that reduces risk while still making gains. It's particularly attractive to those who aren't looking to constantly tweak and fuss over their investments. No shade if that's you. Number two, the endowment portfolio. Big name schools like Yale and Harvard manage massive funds or endowments, and they don't hire dummies to do it. But there aren't any fixed percentages for this. This one is about mindset more than a set formula. It's about thinking beyond the traditional stock and bond mix with more alternative assets such as private equity, real estate and hedge funds.

6:38The goal is to achieve long term growth while lowering risk from the volatile stock market. The financial whiz David Swenson of Yale's Epic Endowment gave some insight into the mix they use to consistently outperform other investment strategies. When Swenson first took over, the fund was mostly U.S. equity, bonds, and cash. Under his leadership, the Yale Endowment has grown to the second largest in the country with a value of over$40 billion. In roughly largest to smallest percentage of the portfolio, it consists of absolute returns, so short-term investments like options that focus on generating profits, venture capital, leveraged buyouts, foreign equity, real estate, cash, and fixed income investments like bonds, natural resources, and U.S.

7:26stocks. The endowment model has historically been successful for several reasons, but namely being so diverse that it's shielded against big losses. Even if you get an F in one class, as long as you get an A in the rest, after four years, your GPA is going to be fine. That's how this portfolio works, too. By investing in asset classes with low correlation to one another, the portfolio can weather different economic conditions better than a traditional stock bond portfolio might. For instance, during periods when the stock market is down, real estate or hedge funds might do well, cushioning the portfolio against large swings.

8:03Number three, the Ray Dalio portfolio. Ah, the famous all-weather portfolio. This model was first introduced by Ray Dalio. I've mentioned him a bunch on the show before, but here are the highlights. He's the hedge fund manager behind Bridgewater Associates, the largest hedge fund in the world. With billions under management, he's widely considered one of the most successful investors of our time. When Ray talks, investors listen. He keeps the exact recipe for his secret sauce hidden, and it isn't easily duplicated on a personal level. But here is a rough formula that Dalio says the individual investor could easily use to duplicate the results of the all-weather portfolio.

8:497.5 % commodities, 40 % long-term bonds, 7.5 % gold, 15 % intermediate-term bonds, and 30 % stocks. This mix is all about covering your bases to benefit from whatever market conditions come your way, whether that's a bull market, a bear market, inflation, or deflation. The portfolio has actually weathered those four economic environments over time. When historically backtested, this portfolio made money 85 % of the time. It also would have lost just 20 % during the Great Depression, while the S &P 500 lost 65%. In some of the other big market drops like 1973 and 2002, Dalio's construction actually made money while the market overall suffered.

9:34Historically, this particular portfolio has made it through bull markets, bear markets, recessions, and everything in between. One way to implement this strategy is to start with the equity portion, so selecting a broad market index fund or ETF to capture the growth potential of the stock market. For the bond component, ETFs, mutual funds that specialize in long-term and intermediate-term U.S. treasuries are ideal for their safety and stability. The gold and commodities allocations can be managed through ETFs that track the respective markets, providing a hedge against inflation and diversifying the portfolio further.

10:09This approach is best suited for investors looking for a balanced, low-maintenance portfolio that aims to reduce volatility and deliver steady returns over time. It's particularly appealing to those who want to diversify their investments extensively beyond the conventional stock and bond mix to include assets like commodities and gold that can provide protection against various economic risks. Number four, the Warren Buffett portfolio. Ah, Warren, we can't shake him and we don't want to. He is the smartest and also the simplest. This portfolio only has two assets. Buffett reportedly outlined his target portfolio breakdown in instructions for his wife and their trust when he dies.

10:50Put 10 % in short-term government bonds and 90 % in a very low-cost S &P 500 index fund, he suggests Vanguard's. I believe the trust's long-term results from this policy, he says, will be superior to those attained by investors, whether pension funds, institutions, or individuals who employ high-fee managers. Okay, Warren. Implementing Buffett's strategy is investing on easy mode. It's one of my personal favorites. You start by selecting a low-cost S &P 500 index fund. The Vanguard one he's talking about is VOO, but any of them will do. Then a little bit into short-term government bonds, either through Treasury bills themselves or a bond fund focusing on short-duration government bonds.

11:34It sounds a little corny, but it's true. Buffett really believes in America. He is confident that over the long haul, the U.S. economy will grow and thrive. By investing in an S &P 500 index fund, he is basically making a bet that his family will benefit from the growth, dividends, and stock buybacks of the top 500 companies in the United States. By investing in treasuries, he's betting on the U.S. government. This method has historically proven successful as the S &P 500 has delivered an average annual return of around 10 % over the long term, despite some nasty weather along the way. This investment strategy is for those looking for something super, super low maintenance.

12:14It's particularly appealing to those who believe stocks mostly go up but want to avoid the headache and the risks of picking individual stocks or timing the market. Buffett's allocation is designed for long-term investors who can ride out market volatility and are also looking for that buy-and-hold strategy. The historical success of the S &P 500 plus Buffett's blessing offers a compelling case for picking the strategy. While no investment strategy is without risk and past performance is not indicative of future results, this approach has the backing of one of the most successful investors in the world.

12:49It is a testimony to the power of simplicity in investing and the importance of patience, discipline, and confidence in the fundamentals of the U.S. economy. Now that you have all of the information on these famous portfolios, the allocations are yours to play with. You can color inside or outside the lines depending on your particular assets, and ultimately the lines are drawn to your individual needs, timeframes, and goals. It all comes down to your own preference and tolerance for risk. Ultimately, I want you to get a good night's sleep. So if you are scared now, honor that feeling. Forget about me.

13:23Forget about Ray. Forget about Warren. How you choose to create your portfolio today is totally up to you. And you have the complete right to change and recreate your investment mix whenever your heart desires. You can always take on more risk. You can always take on less risk as your circumstances change. And they will. For today's tip, you can take straight to the bank. In my new book, The Money School, I have some other templates for asset allocations based on other financial goals and factors like risk tolerance and age. If you want to see all of the options, please order my new book, The Money School.

13:56It is now available at the link in the episode description.

14:03Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok at moneynewsnetwork for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.

14:42Thank you.