While the traditional Couch Potato portfolio mix of global equities and Canadian bonds is a simple and effective approach with good historical returns, it’s a bit too simple for my taste. The main problem is that it doesn’t cover investors for all economic conditions and fluctuations, which leaves numerous portfolio holes.
For example, in the 1970s and early ’80s, there was an extended period of high inflation and stagnant economic growth, or what’s referred to as stagflation. It was a terrible combination in which few assets performed well. Gold, commodities, and real estate would have greatly helped portfolio returns during that period, as shown in the chart below. But those assets are mostly missing from a traditional Couch Potato portfolio, as well as many typical investment portfolios.
Inflation may not be a concern for those in the accumulation stage, as stock markets are a very good long-term inflation hedge. And in fact, commodities can be a drag in the accumulation stage. That said, for those who are in retirement, or in the retirement risk zone, inflation and stagflation are both serious risks. Those retirees and near-retirees might consider these all-weather portfolio models.
As you may have noticed, we have moved into a stagflation environment in 2022.
In this article, I compared the returns of the core and advanced Couch Potato models.
Asset performance in various economic conditions
All-weather ETF portfolios
We can increase diversification and potentially reduce portfolio risk by adding some of these asset classes into our Couch Potato mix. This way, no matter what the economic conditions—growth or contraction accompanied by either inflation or deflation—you can hopefully have at least one asset that is delivering positive returns. There is always something working. A good example of the portfolio strategy is demonstrated by the Permanent Portfolio.
In other words, we can build an “all-weather” Couch Potato portfolio.
It is not well known, but even a balanced portfolio can fail for many years. The following chart uses U.S. stocks and U.S. bonds. An investor could improve the situation slightly by adding Canadian and global stocks, but the theme and risk to the balanced portfolio prevails.
Stocks and bonds don’t always cut it. And sorry that I put a jinx on that. The traditional balanced portfolio is having one of its worst periods ever in 2022. Stocks have been correcting as well as bonds, the latter due to interest rates rising rapidly in the attempt to tame inflation.