The Stay Rich Portfolio

The Stay Rich Portfolio – Strategy, Returns, ETFs, Risk (Meb Faber)

Let’s say you are a wealthy person who has already achieved FIRE (financial independence – retire early) and wants to preserve your wealth. It doesn’t matter what strategy or portfolio you used to achieve wealth because it requires completely different methods, mindsets, and portfolios to preserve it.

Simply put, a portfolio used to build wealth may not necessarily be the best portfolio to keep and maintain your wealth. Let’s assume you have already achieved wealth and want to keep it. This article will look at a possible Stay Rich Portfolio, which we backtest to show returns and risk.

Related reading:

What Is The Best Stay Rich Portfolio

In our opinion, the ideal portfolio for wealth preservation should meet the following requirements:

  • The portfolio must not be leveraged in any way. You must use only your own money, not borrowed money. Don’t even think about it;
  • The portfolio should protect your money from the damaging effects of inflation, meaning its long-term return should be at least 4% per annum (but preferably a margin of safety);
  • The portfolio should be reasonably diversified and, most importantly, not over-diversified. Excessive diversification can worsen your portfolio’s reward/risk ratio;
  • The allocation of assets in a portfolio should be such to minimize drawdowns as much as possible without compromising its long-term returns. This depends on your personal risk tolerance and correlations among the assets/ETFs. For some investors, a -30% drawdown is within reason, while for others, a -10% drawdown is like death.

Additionally, we would like to point out that a market drawdown is not the same as a permanent loss of capital. By itself, short-term market volatility might not have nothing to do with the asset quality in your portfolio.

For example, a company’s share price may drop heavily, resulting in a drawdown. However, the company can continue making money; its assets have not changed, and its long-term prospects have not deteriorated. The share price of such a company will recover over time and continue to grow. Benjamin Graham wrote that Mr. Market is manic-depressive and suffers dramatic mood swings. If you buy market ETFs, company-specific news is not that relevant.

What Are the Best Asset Classes For The Stay Rich Portfolio?

The financial market offers many asset classes to build your Stay Rich Portfolio.

However, the problem is that even traditionally “safe” short-term Treasury bills might also have drawdowns and low returns, which might not protect against inflation. Just look at the table below.

From 1926 to 2019, every asset class had huge drawdowns, whether it was stocks or bonds (the source is one of Meb Faber’s white papers). Therefore, it is worth getting used to the fact that there are no “safe” asset classes in terms of the depth of the drawdown if you invest long enough. The worst drawdown is yet to come!

Let’s rank asset classes by “risk/reward” ratio by dividing the Return by the Max Drawdown (source: Meb Faber):

AssetReturnMaxDDReturn/MaxDD
US Stocks6.99%-79.00%8.85%
Foreign Stocks4.88%-78.00%6.26%
Gold1.73%-42.00%4.12%
US 10Y Bonds2.16%-61.00%3.54%
For 10Y Bonds1.80%-78.00%2.31%
Cash T-Bills0.50%-49.00%1.02%
Cash Mattress-2.87%-93.00%-3.09%

We can see that US and foreign stocks are the best in terms of long-term reward/risk ratio. Therefore, we must include them in our Stay Rich Portfolio.

On the contrary, traditionally considered safe T-Bills show the lowest reward-to-risk ratio. Uncle Sam demands triple the price for his established “brand”, which (naive?) investors associate with safety. However, this is data spanning many decades.

Don’t be naive and believe that T-bills are safer than stocks (at least not for the long term)! If the US stock market collapses and ceases to exist, the US treasury bond market will also collapse. The stock market is the market of businesses, and businesses are the lifeblood of the US market economy.

What if we combine different asset classes? Will this help reduce the maximum drawdown? Let’s look at the table below:

As we can see, only investing globally in as many different asset classes as possible can reduce the maximum drawdown, but not that much. Drawdowns are the pain you need to suffer to get long-term results.

Now, let’s form a list of exciting ETFs that reflect different asset classes and rank them by the Return/MaxDD ratio since inception, as we did before. We picked only the most liquid and broadly diversified ETFs with a long performance history:

Asset ClassETF NameETF TickerReturnMaxDDReturn/MaxDD
TIPSiShares TIPS Bond ETFTIP3.5-14.3924.32%
Corporate Investment Grade BondsiShares iBoxx $ Investment Grade Corporate Bond ETFLQD4.6-24.9518.44%
U.S. StocksSPDR S&P 500 ETF TrustSPY9.84-55.1917.83%
GoldSPDR Gold SharesGLD7.69-45.5616.88%
Corporate High Yield BondsiShares iBoxx $ High Yield Corporate Bond ETFHYG4.3-34.2512.55%
U.S. Real EstateiShares U.S. Real Estate ETFIYR8.23-74.1311.10%
Foreign StocksiShares MSCI EAFE ETFEFA5.21-61.048.54%
International Government BondsiShares International Treasury Bond ETFIGOV-0.17-35.88-0.47%
International Real EstateSPDR Dow Jones International Real Estate ETFRWX-0.42-73.57-0.57%

We will form and backtest our Stay Rich Portfolio based on these ETFs. You can see that foreign ETFs have the worst Return/MaxDD ratios, but we will include them in our Stay Rich portfolio anyway because we need to have exposure to foreign countries to reduce drawdowns.

TIPS are specifically designed to protect money from inflation and do a much better job than T-Bills. The only downside to these Treasury securities is that they can perform poorly when inflation is low, but corporate bonds will compensate for this downside. Corporate bonds usually perform very well in low-inflation periods.

Moderately Conservative Stay Rich Portfolio

Based on the previous information that we explained, we can form our moderately conservative Stay Rich Portfolio, which will include the following asset classes with appropriate weights:

Asset ClassWeight
Bonds50%
Stocks38%
REITs7%
Gold5%
  • Bonds and Gold will predominantly protect our Stay Rich Portfolio from inflation and huge drawdowns;
  • Stocks and REITs will predominantly generate returns above inflation and help increase portfolio diversification and thus reduce the maximum drawdown of our Stay Rich Portfolio.

The more detailed portfolio structure is as follows:

Stay Rich Portfolio assets
Asset ClassETF TickerWeight
US StocksSPY26.60%
Foreign StocksEFA11.40%
US REITsIYR4.90%
Foreign REITsRWX2.10%
GoldGLD5.00%
TIPS (Treasury Inflation-Protected Securities)TIP25.00%
US Investment Grade Corporate BondsLQD10.00%
US High Yield Corporate BondsHYG5.00%
Foreign Government BondsIGOV10.00%

Approximately 75% of the Stay Rich portfolio’s exposure is in the USA, and 25% – in foreign countries. In reality, we have a larger than 25% exposure because many US companies also operate in foreign countries. S&P 500 is a global behemoth.

Backtesting Of The Stay Rich Portfolio

Let’s backtest The Stay Rich Portfolio with the following conditions:

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Portfolio equity curve:

Stay Rich Portfolio

Below is the portfolio’s underwater curve (drawdowns, i.e., decline in value from a relative peak value to a relative trough):

Stay Rich Portfolio risk and returns

Portfolio monthly and annual returns:

YearJanFebMarAprMayJunJulAugSepOctNovDecYr%
2003-2.2%-0.3%-0.1%3.7%2.9%0.6%0.4%1.2%0.7%2.3%0.9%3.1%13.6%
20041.3%1.4%0.4%-3.3%1.4%1.0%-1.0%1.6%0.5%1.4%2.0%2.1%9.1%
2005-1.3%1.1%-1.1%0.2%1.0%0.9%0.9%0.8%0.8%-1.7%2.1%1.2%4.9%
20062.2%0.2%0.7%1.3%-1.5%0.1%1.1%1.6%0.7%1.8%1.9%0.0%10.5%
20071.3%0.1%0.5%2.1%0.7%-1.4%-1.3%1.3%3.0%1.8%-1.1%-0.6%6.4%
2008-1.0%-0.5%-0.4%1.9%0.3%-3.6%-0.6%-0.4%-6.3%-12.0%-2.2%6.3%-18.0%
2009-5.0%-6.6%5.0%5.3%5.1%-0.0%4.9%2.6%3.2%-0.8%4.3%-0.3%18.3%
2010-1.6%1.1%2.9%1.5%-4.4%-0.9%4.3%-0.5%4.8%2.7%-1.9%3.2%11.4%
20110.9%2.3%0.0%3.6%-0.6%-0.8%1.0%-1.8%-5.0%6.0%-1.2%0.3%4.4%
20123.6%2.0%0.6%0.4%-3.6%2.6%1.5%1.5%1.6%-0.0%0.5%0.8%12.0%
20131.8%-0.0%1.5%1.9%-2.3%-2.8%3.2%-2.0%2.8%2.5%0.2%0.7%7.5%
2014-0.6%3.1%-0.1%1.3%1.6%1.3%-1.2%1.8%-2.9%1.4%0.9%-0.8%5.6%
20151.0%1.3%-1.0%0.8%-0.3%-1.9%1.0%-3.2%-1.3%3.8%-0.8%-1.1%-1.8%
2016-1.6%1.0%4.4%1.1%-0.3%1.9%2.2%-0.4%0.4%-2.0%-1.2%1.1%6.6%
20171.6%1.9%0.3%1.2%1.2%0.1%1.7%0.7%0.3%0.8%1.3%1.1%12.9%
20182.1%-2.7%-0.1%-0.1%0.4%0.1%1.3%0.8%-0.2%-3.8%1.0%-2.9%-4.3%
20194.9%1.1%1.7%1.5%-1.8%4.0%0.3%1.1%0.4%1.4%0.9%1.7%18.4%
20200.8%-3.2%-8.0%6.2%2.7%1.7%4.2%2.4%-1.9%-1.4%5.7%2.8%11.7%
2021-0.8%-0.1%1.4%3.2%1.5%0.5%2.2%1.0%-2.9%3.2%-0.9%2.8%11.5%
2022-3.6%-1.3%0.2%-5.7%-0.1%-5.7%5.4%-4.3%-7.6%3.3%5.8%-2.5%-15.8%
20235.2%-3.1%3.3%1.1%-1.6%2.3%N/AN/AN/AN/AN/AN/A7.2%

This is the performance statistics of the Stay Rich Portfolio:

Statistical MetricValue
Annual Return %6.01%
Exposure % (lacked some data in the first 2 years)93.95%
Risk Adjusted Return %6.40%
Max. drawdown-31.63%
CAR/MaxDD0.19
Standard Deviation9.58%
Sharpe Ratio (3% risk-free rate)0.31

Conclusion On The Stay Rich Portfolio

  • Our Stay Rich portfolio has a maximum drawdown of -31.63% with a compound annual return of 6.01%. This is an acceptable performance for a moderately conservative portfolio (in our opinion);
  • If you want to reduce the maximum drawdown at the price of returns, you can increase the share of bonds in the portfolio to 60%.
  • You might also consider adding commodities and/or managed futures to the Get Rich Portfolio. This might increase diversification and correlation and, thus, drawdowns.

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