How to diversify your portfolio to protect yourself from market risks? (4/20)

The Permanent Portfolio is interesting for the investor who avoids volatility (negative years with this approach are very rare), but at the expense of a loss of profitability compared to pure stocks. This is one of the reasons why more people are not getting into it.

Indeed, since stocks often perform strongly over many years, it is very difficult for most people to remain unmoved by the enormous potential gains that this represents. Having 3/4 of your portfolio invested elsewhere than in stocks during these providential periods is difficult to bear.

While the profitability of the Permanent Portfolio remains positive during periods of strong growth, it is nevertheless much lower than that of the stock market. You have to be pretty strong to keep your eyes closed when the stock market climbs by several dozen percentage points for many years in a row.

The other explanation is that these 4 assets correspond to 4 very specific types of investors: the entrepreneur (shares), the paranoid (gold), the materialist (cash) and the good father (bonds). We all have one of these hats, or even two, but much more rarely 3 or 4.

Some of these assets will be completely against our very nature, to the point that we will simply not be able to invest in them. For most people, stocks and gold are far too risky and speculative instruments. However, when we look more closely, even if it is more insidious, bonds and cash also have risks. Typically, cash and bonds do not protect against inflation.

As far as I'm concerned, it's gold that poses the most problems for me. I have a lot of trouble with this inert material that doesn't create wealth and that quite often comes down to pure speculation. Investing ¼ of my fortune in the yellow metal therefore seems insane to me. Nevertheless, I must admit that if I had been invested, even partially, in gold during the period 2000-2010, rather than almost 100% in shares, I would have been better off.

Conversely, I have no problem buying shares, even if I am more cautious these days. As for cash, even if I like to have some in anticipation of a future correction in the stock markets, to take advantage of new bargains, I also have a little trouble imagining keeping ¼ of my fortune in cash.