Make your portfolio recession proof – taking a look at my kids portfolio!

Make your portfolio recession proof

We are now more than 10 years into a bull market. Historically, that’s a very long time. That made me think about rebalancing the portfolio of my kids. I just wanted to know: how can I make this investment portfolio recession proof?! After looking into the all-weather portfolio by Ray Dalio, I’ve even included some instruments that I wouldn’t have considered otherwise. Let’s dig in.

The initial portfolio before rebalancing

For those of you new to the blog, the goal of this portfolio is to give my 2 kids a head start once they are 18 (some 13-15 years away from today). By investing at least EUR 200 every month I’m trying to make the most of it.

Since they don’t need to money for at least 13-15 years (and hopefully longer) I’m investing pretty aggressively. Stocks only. Some will consider this imprudent or even careless, but I’m confident that in the long run stocks are the way to go.

The initial portfolio before rebalancing looks like this:

Instrument Value (EUR) % of portfolio
Apple 250 4%
Berkshire Hathaway 1,500 25%
EURO STOXX 50 ETF 1,900 32%
World Small-cap ETF 200 3%
FTSE Emerging Markets ETF 100 2%
S&P 500 ETF 1,850 31%
Global Real Estate ETF 200 3%
  6,000 100%

As you can see, it’s a pretty basic portfolio. Around 63% exposure to large-cap stock ETFs in the United States and Europe. A significant part of the portfolio is allocated to Berkshire Hathaway . Although, Berkshire lags a bit in performance compared to the S&P 500 in 2019, I’m confident that they will outperform the S&P 500 when the next recession hits.

Looking at the total percentage of stocks in this portfolio, I felt a bit too much exposed in a next recession. It’s not a crazy amount of money but I still don’t want it to become even less. That’s why I decided to rebalance and reposition the portfolio a bit.

The portfolio after rebalancing

Let’s first look at the end-result, afterwards I will explain my reasons for the changes.

Instrument Value (EUR) % of portfolio
Apple 0% (-/-)
Berkshire Hathaway 2,000 33% (+/+)
EURO STOXX 50 ETF 1,050 18% (-/-)
World Small-cap ETF 200 3%
FTSE Emerging Markets ETF 0% (-/-)
S&P 500 ETF 1,100 18% (-/-)
Global Real Estate ETF 800 13% (+/+)
ETFS Physical Gold ETF 500 8% (+/+)
WT Physical Silver ETF 350 6% (+/+)
  6,000 100%

Sold positions

I’ve sold a significant part of my shares in the Euro Stoxx 50 and S&P 500 ETFs. On top of that,I’ve also sold my share in Apple and the Emerging markets ETF. The reason for this is simple: I want to increase diversification and improve the performance of this portfolio in the next recession. I’m not a big fan of timing the market, but diversification is a valid reason to rebalance and reposition the portfolio.

In total I’ve sold EUR 1,950 worth of stocks and reinvested that in Berkshire Hathaway, Global Real Estate ETF and in ETFs that hold physical gold and silver.

Berkshire Hathaway

The reason why I’ve increased my position in Berkshire Hathaway is mainly because of the active element of this ‘fund’. Because of the size of Berkshire Hathaway it has a lot of difficulty to outperform the S&P 500 in a bull market, but in a bear market I’m betting on Buffett and his team.

On top of that, Berkshire Hathaway has about USD 130 billion in cash. So I find it a solid choice to increase my stake in Berkshire Hathaway this late in the economic cycle.

Make your portfolio recession proof. Investing in real assets such as gold.
Gold, the most ancient form of a real and valuable asset.

Real assets

To increase the diversification of this portfolio, I’ve added some more shares in a global real estate ETF. Real estate is a good hedge against inflation because cashflow from real estate tends to move in line with the increase in prices.

What I’ve never really considered seriously are real assets such as gold and silver. The reason is obvious. Gold and silver do not produce ANYTHING. The gold and silver just sits in their vaults. However, in times of recession and economic uncertainty people tend to flock to these real assets. In turn, this drives up prices. It’s simply supply and demand.

What made me consider gold and silver for this portfolio, were the comments from renowned hedge fund manager Ray Dalio. His view is that every portfolio should have about 10% in gold/silver. He even goes as far to say:

“If you don’t own gold, you know neither history nor economics”.

Ray Dalio

So am I going to say that gold and silver a great investments for long-term investors? No. Do I think that they are a good addition to decrease the volatility of this portfolio this late in the economic cycle? Yes. And do I think that you need to add gold into the mix to make your portfolio recession proof? Yes.

Backtesting the returns on both portfolios

Out of curiosity I’ve decided to backtest both portfolios. Unfortunately, a lot of ETFs are only available in Europe and are not available on the Portfolio Visualizer website, so I needed to be a bit creative.

The blue line (portfolio 1) is the portfolio before rebalancing and the red line (portfolio 2) is the portfolio after rebalancing.

Source: portfoliovisualizer.com

In above overview I made the assumption that I would rebalance the portfolio every year. As you can see portfolio 2 is ahead most of the time. Especially in the period 2010 until 2013. These of course were uncertain times economically.

However, I’m a bit surprised that the difference between both portfolio is that minor in 2008 and 2009. I expected a larger difference because I added gold and silver to the portfolio. Apparently the position is too minor to make a significant impact.

If I add a third portfolio to the mix – 100% gold – the results are a lot different:

source: portfoliovisualizer.com

This really shows why I added gold to this portfolio. The impact of a 100% gold portfolio compared to portfolio 1 and 2 is just astronomical. However, once the economic ‘peace’ returns the benefits of gold on the performance of your portfolio diminishes quickly.

Obviously, no one can time the market and be right all of the time. What I’m trying to do is to improve my risk-adjusted returns. Because no one can dispute that we are now in one of the longest bull markets of all time and the economic machine is slowing down… Better be prepared!

What are your views on rebalancing your portfolio? Have you included gold as well? Please let me know in the comments below.

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