Diversify Your Holdings Using The Weird Portfolio

During their latest episode of the VALUE: After Hours Podcast, VSG, Taylor, and Carlisle discuss Diversify Your Holdings Using The Weird Portfolio. Here’s an excerpt from the episode:

Tobias: How does The Weird Portfolio deal with something like this? What’s the thinking behind The Weird Portfolio?

VSG: So, the thinking behind The Weird Portfolio is that you have some assets in there that should do well under different economic conditions. It really is created out of Harry Browne’s Permanent Portfolio. So, Harry Browne’s Permanent Portfolio is 25% stocks, 25% cash, 25% long-term Treasuries, and 25% gold. Your gold is there for inflation, your long-term Treasuries are there for a big deflationary bust, your cash is there to smooth things over, and then you have your stocks for prosperity. So, The Weird Portfolio is similar to that, but it’s a little bit more aggressive with some different tilts. So, it’s 20% US small-cap value, 20% international small, 20% long-term Treasuries, 20% gold, and then you have 20% that’s in real estate.

The thinking there is that you can pivot away from those big large cap bubbles by pivoting to small-cap value, and then you can internationally diversify it, so you can avoid some of the local bubbles, but that small-cap value is going to get crushed if there’s a deflationary bust. So, long-term Treasuries are there to help. If for instance, we do enter another 2008 or 1929 to 1932 situation, rates will come down pretty dramatically. You’ll probably have deflation that should help the portfolio. Gold is in there as a flight to safety asset. So, during a really extreme time of fear, like, COVID or the 2008 crisis, gold will either be stable or sometimes it goes up. It went up pretty significantly, like, 1929 to 1932.

It should also, over the long run, keep up with inflation, but that’s not always true. It should also help if the dollar weakens. So, that’s there as well. You have some real estate in there which has similar return characteristics to small-cap value, where it can deliver a steady stream of returns, if we have some prosperity. It should be somewhat uncorrelated with those big large cap bubbles that we get from time to time. The thinking behind it is I can’t predict what’s going to happen next. So, I’m going to own a mix of these different asset classes and some cheap ETFs and then hopefully I can get a smoother rate of return over the long run.

Jake: Two questions. One, how do you express the gold holding and the real estate?

VSG: Gold, I use SGOL and another one, I use is GLDM. So, the two ETFs. So, obviously, if you’re a true gold bug, you don’t want to own gold ETFs. I’m not so much concerned about the financial system collapsing in some kind of horrible scenario. I think in that, physical gold won’t really help you much. Anyway, you need guns and you need canned goods. They’re probably what you need in that scenario. So, I do it through those ETFs. And then real estate is through the large index funds like REIT. That’s the iShares product that gives you some global exposure to real estate. And then I use VNQ and VNQI, which are the Vanguard products.

Jake: Question number two. When are you launching The Weird ETF?

[laughter]

VSG: I don’t know. If anyone’s interested, I’m all ears about it. It would be nice to have one little ticker that I could just click on and buy it, rather than have to do the rebalancing and constantly try to add to what’s light all the time.

Tobias: What’s the ticker?

VSG: I don’t know. What would be a good ticker? WRD? [laughs]

Tobias: We’ve got to keep on workshopping that one.

Jake: Yeah.

VSG: [laughs]

Jake: Needs a little work.

VSG: [laughs]

Tobias: But it’s a good start.

VSG: Yeah, it’s basically like a risk parity style portfolio. If you take it back to 1970, it gives you a pretty similar return to owning 100% US stocks, but with more shallow drawdowns and less volatility. It’s definitely underperformed over the last 10 years while US markets have gone nuts. But I think if you hold it over a 20-, 30-year period, it should do better. Even if it doesn’t, it helps me sleep better at night knowing that I have some protections in there if we have a 2008 kind of scenario.

Jake: What you need to do then is lever it up to 150-

Tobias: Now you are [unintelligible [00:17:14]

Jake: -and now you’re really cooking.

Tobias: [laughs]

VSG: Well, that’s how you get into trouble. A lot of these risk parity style portfolios got into trouble last year, because it was this unusual year where bonds and stocks went down at the same time. [crosstalk]

Jake: Correlations broke down.

VSG: Yeah. That’s going to happen every once in a while. It’s going to happen every time that the Fed has one of these hard money kinds of phases. They don’t last particularly long, but if you’re levered it defeats the purpose of what you’re trying to do, which is get just a smooth and steady return and be able to plan things out better.

Tobias: So, when you’re picking stocks, are you picking small-caps or is that taken care of by the ETF?

Jake: Like, for the writeups?

VSG: Yeah. So, I look at that is taken care of by my small-cap value ETF. What I’m looking for are really good businesses. So, I’m basically going through companies one by one and then writing them up on my Substack. And the companies I’m looking at tend to be larger and mid-caps, mainly, because I think there’s better businesses in that segment. When I buy an individual stock, I want the kind of thing I can hold for like 5 to 10 years, and I’m finding more of those businesses in the large and mid-cap space. I’m not opposed to owning a small-cap. That’s really high quality. It seems to be that the better businesses are in the mid and large.

Tobias: How are you making the determination? Like, how do you know what to look at?

VSG: That’s tough. So, I do have a long list of companies that I know anecdotally are pretty good. For instance, Visa, Mastercard, Google. Everyone knows these are pretty good businesses. I have a pretty large list of companies that I want to look at that are like that. Some sources that I’ve looked at before to look for some ideas would be like the Dividend Aristocrats. That’s one idea. I’ve looked at some of the quality ETFs to try to find them in there, but I don’t want to fall into the trap of buying these things when they’re egregiously expensive. I want to buy them when they’re a little beaten up and there’s a margin of safety there. So, I’m basically building up this watch list of companies and then buying them when they get a little bit cheap. If I can’t find any, then I’ll hold this asset allocation instead.

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