How to diversify your portfolio to protect yourself from market risks? (5/20)

Despite the reservations that everyone may have regarding cash, bonds, gold or shares, Browne's method at least has the merit of making us aware that there are possible alternatives to the investments that we usually use and above all that these can even prove extremely effective during certain periods.

Even if you don't want to or can't devote ¼ of your portfolio to each of these assets, there's nothing to stop you from diversifying your assets a little more with these other investments. Browne helps us avoid being caught off guard like La Fontaine's cicada.

Let's now take a quick look at the assets at our disposal:

Cash / short term bonds

Having some cash is a good thing, especially when the stock market is overvalued. Not only do you avoid buying overpriced stocks, but above all you keep some ammunition to draw when the stock market has fallen. Even the great Warren Buffett, a fervent supporter of stocks, likes to keep cash on hand. Cash is King as the maxim goes.

Browne et d’autres semblent penser également qu’il est même particulièrement utile en période de déflation. Mais les faits, notamment au Japon dans les années ’90 lui donnent tort (un portefeuille 100% actions ou 50%actions / 50% obligations aurait été plus efficace). Dans les années ’30, c’est l’or, aux vertus pourtant anti-inflation, qui a été le plus efficace.

The problem with cash is that with the current expansive monetary policies, interest rates are close to zero. "Savings" accounts bring in almost nothing. The rates on short and medium term bonds in Switzerland are even negative!

Investing 1/4 of your portfolio in an asset that brings nothing back, or worse, will certainly lose money, is difficult to conceive for anyone who has even a little financial knowledge. However, Mr. and Mrs. Average do this not with 1/4, but with all of their savings, which is obviously much worse (and here we are not even talking about the risk of loss of purchasing power due to inflation, because currently in Switzerland, fortunately, we do not know any...).

So a little cash, yes, to take advantage of opportunities, but not to invest sustainably. There is no real reason to take this asset into account in the portfolio. Graham also suggests in theSmart Investor to do dollar cost averaging (investing the same amount periodically), which reduces timing errors. Obviously, we will wait patiently if there is nothing more interesting to sink our teeth into...

Strategies similar to the Permanent Portfolio, but without cash, i.e. composed solely of gold, stocks and bonds, also show a better result. Marc Faber, a Swiss investor known for his "bear" leanings, even suggests replacing Browne's "cash" portion with real estate. His asset allocation portfolio is among those that offer one of the best returns over the long term (using only a buy&hold approach - easy to follow for a passive investor).

In short, for cash/short term bonds : do not take into account permanently in the allocation of the portfolio, invest periodically using the dollar cost averaging technique, unless there is nothing left to sink your teeth into.