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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4 thoughts on “Make your portfolio recession proof – taking a look at my kids portfolio!”

  1. Hoi! First of all, super nice blog that you have. I write myself on my blog yoranbrondsema.com where I try to help the Belgian investor navigate the world of passive investing.

    I was facing a similar issue to the one you had in this article, that is the difficulty of backtesting European ETFs. So I built a tool for that! It’s called Backtest and it’s available at backtest.curvo.eu.

    I pre-built the three portfolios that you attempted to backtest:
    – before rebalancing: https://backtest.curvo.eu/portfolio/NoIgYglgdghlDGEYBsAEBhAFhADgWwFcoBrVAWlQCEBTAMwHsAna1ZgIxTkSgHMQAaYKACqAZQAMADgAsANgDs4gIxTZA8QDoATAFYAuoJAARAKLjzAQSXpxlSvPUaAzFoOgAkmdthpAJTAAEk5KjuJObiCe5pQA0jqUvvJOTqGuhlG2TgCa6ADiAFJOko7BEQAywkrSTopKkpJFobIAnK1t7e36enpAA
    – after rebalancing: https://backtest.curvo.eu/portfolio/NoIgYglgdghlDGEYBsAEBhAFhADgWwFcoBrVAWlQEEAzAFwFMAnVR+gIxTkSgHMQAaYKACqAZQAMADgAsANgDs4gIxTZA8QDoAzFoC6gkABEAouLOUl6cQCFr89RqWT9oAJKmbYaQCUwACS0lB3E9A3czay0ATXQAcQApLUkHJxcQABlhJWktRSdJJJTQ0BMzcQsAWWN0USD+TSk00vNxADlZACYwDuD5XX6gA
    – gold: https://backtest.curvo.eu/portfolio/NoIgYglgdghlDGEYBsAEBhAFhADgWwFcoBrVAWlQHEB7ZAExABphQARAUQAZuBBARgCy7dAGU+TPgF1pQA

    And here you also have a comparison of the three portfolios in a single chart: https://backtest.curvo.eu/compare?portfolios=NoIgYglgdghlDGEYBsAEBhAFhADgWwFcoBrVAWlQCEBTAMwHsAna1ZgIxTkSgHMQAaYKACqAZQAMADgAsANgDs4gIxTZA8QDoATAFYAuoJAARAKLjzAQSXpxlSvPUaAzFoOgAkmdthpAJTAAEk5KjuJObiCe5pQA0jqUvvJOTqGuhlG2TgCa6ADiAFJOko7BEQAywkrSTopKkpJFobIAnK1t7e36enpAA%2CNoIgYglgdghlDGEYBsAEBhAFhADgWwFcoBrVAWlQEEAzAFwFMAnVR%2BgIxTkSgHMQAaYKACqAZQAMADgAsANgDs4gIxTZA8QDoAzFoC6gkABEAouLOUl6cQCFr89RqWT9oAJKmbYaQCUwACS0lB3E9A3czay0ATXQAcQApLUkHJxcQABlhJWktRSdJJJTQ0BMzcQsAWWN0USD%2BTSk00vNxADlZACYwDuD5XX6gA%2CNoIgYglgdghlDGEYBsAEBhAFhADgWwFcoBrVAWlQHEB7ZAExABphQARAUQAZuBBARgCy7dAGU%2BTPgF1pQA

    It’s not as powerful (yet) as Portfolio Visualizer but I’m slowly adding more and more types of analysis. However, it does have the advantage of being focused on the European investor: it only funds that are accessible to European investors and all the data is in Euro (Portfolio Visualizer only has USD as far as I know).

    Maybe you want to update the backtest charts in the article to the ones from Backtest?

    PS: Ik ben Nederlands maar aangezien je blog in het Engels is, dacht ik dat het beter was om in het Engels te schrijven.

    1. Hi Yoran! Thanks so much for your comment, much appreciated!! Awesome that you’ve created a tool to backtest European ETFs. That solves an issue many European index investor face. It’s interesting to see the outcomes. I will definitely make use of your Backtest tool. The portfolio has changed quite a bit since this post, so I will your tool to update the portfolio backtest in another blog post. Where do you get the historical data from? Once again, thanks for stopping by and your valuable input! FC

      1. Glad you like it! Finding the data is actually the hardest part. Unfortunately a unified API with all the index data that goes back as far as possible does not exist, at least not at a low cost. My preferred source are the index providers themselves: MSCI, DAX, STOXX and a couple of others supply great historical data directly from their website. The tricky part is to automate the fetching of the data cause I don’t want to manually do that every month for the 150+ indexes (and growing). So it involves writing scripts to parse Excel sheets, websites or graphs.

        If the index provider does not provide the data, I usually the provider of one of the funds. In its product page, it often shows how the fund performance compares to its benchmark (the index). So that’s an alternative way to get the index data.

        If that doesn’t work either, I get the data from websites like investing.com or ft.com. The data is not always clean so I have a bunch of automated tests that can detect when a data source is “bad” (e.g. missing a month or something).

        It’s a tricky process but it gets easier as I add funds and indexes and learn. But I guess that’s why such a thing does not exist yet and why people find Backtest valuable 🙂

        1. Thanks for the info. I appreciate the work you put in! It can be frustrating to need to look for US alternatives to backtest a UCITS based index. Especially as we as Dutch investors are no longer allowed to invest in cheaper US based alternative ETFs as they often do not have a Dutch KID… As if the majority of people that want to invest do not know some basic English 😉 Thanks again.

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