What Are the Best Asset Classes to Get Rich? – The Get Rich Portfolio by Meb Faber

What Are the Best Asset Classes to Get Rich? To become rich, you will need to choose a portfolio that will generate the highest possible return with the lowest potential risk.

Imagine that you are a poor person who wants to become rich. The stock market offers you many asset classes and investment portfolios, but not every asset class and portfolio will suit this purpose.

In this article, we will look at possible ways that can help you become rich. We will create and backtest our Get Rich Portfolio Strategy designed for this purpose. We stole the title of the article from Meb Faber.

Related reading:Other portfolio investment strategies and systems

What Is The Best Get Rich Portfolio?

What Are the Best Asset Classes to Get Rich? In our opinion, the ideal portfolio for getting rich should meet the following requirements:

  • The portfolio shouldn’t use leverage. Ideally, you should only use your own money, not borrowed money. Of course, you can get rich faster if you use leverage and have positive returns, but you can also lose money faster. It’s all a trade-off;
  • The portfolio should have a sufficient level of return so that you have time to become wealthy at a relatively mature age;
  • If the portfolio returns are low, then you risk not living to see that happy day when you become rich, or get rich when you are old or sick. Why do you need this wealth if your health is gone?
  • If the portfolio return is high, then you risk losing part of your funds or all of your funds without reaching your goal (assuming higher risk);
  • The portfolio should be reasonably diversified and, most importantly, should not be overly diversified. Over-diversification can worsen your portfolio’s reward/risk ratio;
  • The allocation of assets in a portfolio should be such to minimize drawdown as much as possible without compromising its long-term returns.

What Are the Best Asset Classes For The Get Rich Portfolio

The financial market has many asset classes to offer to build your own Get Rich portfolio, but not all asset classes will suit our goal.

Professor Jeremy Siegel, in his book “Stocks For The Long Run,” conducted a study and found out that over the past 220 years (from 1801 to 2021), stocks have been the most productive asset class. Other asset classes, such as Bonds, Bills, and Gold lag far behind stocks:

Get rich portfolio

If you invested $1 in stocks in 1801, that $1 would be worth $2,334,920 in 2021. If you invested $1 in bonds it would only add up to $2,163. The difference is simply enormous! The bills and gold are even worse than bonds in terms of performance.

Therefore, the answer suggests that to become rich, you must invest mostly in stocks!

However, most humans don’t become over 200 years old, and most people want to get rich quickly. What is quickly? That is relative, but you need a a couple of decades of investing (and a lot of saving).

A stock is a security issued by a joint-stock company, in other words, an issuing company. All investors who bought the stocks became co-owners of the company – they are shareholders. It might be a small ownership in a public company, but it’s a part that can be valuable.

It’s simple: to get rich, you need to become a co-owner of a successful profitable business. And to become a co-owner, you need to buy stocks.

If you open Forbes magazine and look at the ranking of the richest people in the world, you will notice one fact: almost all of them are business owners, i.e. owners of a huge business. In this ranking, you will hardly find bond or gold holders who have been able to build a massive fortune with gold and bonds.

Now, let’s form a list of interesting ETFs that reflect different stock categories and rank them by the Return/MaxDD ratio since inception. We picked only the most liquid and broadly diversified ETFs with a long performance history:

Stock CategoryETF NameETF TickerCAR (%)MAXDD (%)Return/MaxDD
Large-, Mid-Cap BlendSPDR S&P 500 ETF TrustSPY9.84-55.1917.83%
Large-, Mid-Cap ValueVanguard Value Index FundVTV8.36-59.2714.10%
Small Cap ValueVanguard Small Cap Value Index FundVBR8.61-62.0113.88%
Small-Cap BlendiShares Russell 2000 ETFIWM7.47-58.6412.74%
Large-, Mid-Cap GrowthInvesco QQQ TrustQQQ9.11-82.9610.98%
Small Cap GrowthiShares Russell 2000 Growth ETFIWO5.79-60.19.63%
Large-, Mid-Cap International BlendiShares MSCI EAFE ETFEFA5.21-61.048.54%
Small-Cap International BlendiShares MSCI EAFE Small-Cap ETFSCZ3.56-61.865.75%

We will form and backtest our Get Rich portfolio based on these ETFs. You can see that all stock ETFs have high maximum drawdowns. However, this is the price of higher returns than bonds, gold, and other assets.

We want to point out that a maximum drawdown is not the same as a permanent loss of capital. By itself, short-term market volatility has nothing to do with the very quality of the asset in your portfolio. As Charlie Munger once said, everyone should expect a 50% drawdown if they live long enough.

For example, a company’s stock may drop heavily in price, resulting in a drawdown, but the company still continues to make money, its assets have not changed, and its long-term prospects have not deteriorated either. The stocks of such a company will recover over time and continue to grow. You need to be patient and not be afraid of drawdowns, but research tells us that huge drawdowns make investors nervous, and they sell – at the worst possible moments.

Moderately Aggressive Get Rich Portfolio

Based on the previous information that we looked at, let’s form a moderately aggressive Get Rich portfolio, which will include the following stock asset categories with different weightings:

Moderately Aggressive Get Rich Portfolio
Stock CategoryETF TickerWeight (%)
Large-, Mid-Cap BlendSPY25
Large-, Mid-Cap ValueVTV15
Small Cap ValueVBR9
Small-Cap BlendIWM15
Large-, Mid-Cap GrowthQQQ10
Small Cap GrowthIWO6
Large-, Mid-Cap International BlendEFA14
Small-Cap International BlendSCZ6
  • Geographic exposure: We allocate 80% to US stocks and 20% to international (foreign) stocks;
  • Capitalization: We allocate 64% to mid/large stocks and 36% to small stocks;
  • Type of stocks: We allocate 54% to blend, 24% to value, and 16% to growth stocks.

We are confident that such an allocation is the most optimal to minimize drawdowns in times of crisis.

Backtesting The Get Rich Portfolio

Let’s backtest our Get Rich Portfolio under the following conditions:

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Portfolio equity curve:

Backtesting The Get Rich Portfolio

The portfolio’s underwater curve (drawdowns, i.e., decline in value from a relative peak value to a relative trough) looks like this:

Get rich portfolio drawdowns

Portfolio monthly and annual returns:

YearJanFebMarAprMayJunJulAugSepOctNovDecYr%
2003-3.6%-0.9%-0.2%6.4%5.5%0.8%2.9%2.7%-0.7%5.2%1.6%3.2%24.9%
20041.8%1.3%-0.5%-3.2%1.8%2.9%-4.3%-0.0%2.5%2.1%6.0%3.1%13.9%
2005-3.0%2.1%-2.1%-3.0%3.9%1.2%4.4%-0.5%1.2%-2.8%4.1%0.5%5.8%
20064.7%0.1%2.8%1.4%-4.0%0.2%-0.6%2.4%1.7%3.9%2.4%1.1%16.9%
20071.5%-1.1%1.3%3.4%3.3%-1.1%-3.9%1.3%3.3%2.6%-5.0%-1.2%4.1%
2008-7.0%-2.8%-0.1%4.9%2.6%-8.7%0.0%1.1%-9.7%-18.9%-8.7%3.7%-37.7%
2009-9.5%-10.9%8.6%12.8%6.7%0.5%8.6%3.9%4.5%-3.6%4.6%3.7%30.5%
2010-3.8%3.0%7.0%2.3%-8.4%-5.4%7.7%-5.3%10.5%4.0%0.0%7.5%18.5%
20111.6%4.0%0.3%3.4%-1.6%-1.9%-2.3%-7.1%-8.7%11.6%-1.0%0.3%-2.8%
20125.9%4.1%2.6%-1.2%-7.3%4.8%0.1%3.1%2.7%-1.5%0.9%2.4%17.1%
20135.2%0.8%3.6%1.9%1.9%-1.5%6.1%-2.7%5.1%3.8%2.8%2.4%33.1%
2014-3.3%4.9%0.1%-0.5%1.9%2.9%-2.6%3.6%-3.1%2.8%1.7%-0.1%8.1%
2015-2.4%6.1%-0.6%0.7%1.5%-1.6%1.3%-6.3%-3.5%7.4%1.0%-2.6%0.3%
2016-6.3%-0.7%7.2%0.9%1.7%-0.6%4.6%0.7%0.8%-2.6%4.7%2.3%12.8%
20171.9%2.9%0.7%1.5%1.0%1.1%2.0%-0.0%3.1%2.0%2.5%1.0%21.3%
20184.8%-3.8%-1.3%0.7%2.7%0.1%2.9%2.6%-0.4%-8.3%1.6%-9.2%-8.3%
20198.8%3.6%0.5%3.7%-6.8%6.8%0.6%-2.9%2.3%2.7%3.3%3.0%27.7%
2020-1.5%-8.3%-15.7%11.9%5.5%2.6%4.3%6.4%-3.2%-1.4%13.7%5.6%17.1%
20210.7%3.9%3.3%3.8%1.2%1.1%0.3%2.5%-3.9%5.3%-2.6%4.0%21.0%
2022-5.9%-1.7%2.3%-8.3%0.7%-8.6%8.4%-3.7%-9.3%8.8%6.2%-4.9%-16.9%
20237.7%-2.3%0.9%0.8%-0.8%5.4%N/AN/AN/AN/AN/AN/A12.0%

Performance statistics and returns of the Get Rich Portfolio:

Statistical MetricValue
Annual Return9.25%
Exposure97.42%
Risk Adjusted Return9.50%
Max. drawdown-57.44%
CAR/MaxDD0.16
Standard Deviation21.84%
Sharpe Ratio (3% risk-free rate)0.29

Get Rich Portfolio – conclusion

  • Our Get Rich portfolio has a maximum drawdown of -57.44% with a compound annual return of 9.25%. This is a decent performance for a moderately aggressive portfolio that was put together by using stock ETFs only;
  • If you want to get a better Return/MaxDD ratio, then you should use active strategies that pick individual stocks and make concentrated portfolios. However, that is risky;
  • Drawdowns are to be expected, and thus, leverage can be lethal for your finances. You need to be patient and realize that a drawdown is a “short-term” phenomenon (though it can last many years, even decades, just look at 2000-2010);
  • You can use drawdowns to your advantage. When stock markets are down, you can buy more stocks at a much lower price. The less you pay, the more you get! A long-term investor should be happy for lower prices.

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