Plan B

You have probably seen the slogan from Marks and Spencer: ‘Plan A, because there is no Plan B’. Nice talk, referring to saving the planet (Plan A). I’m not sure if shopping at M+S will help to save the planet or not. What about shopping at a charity store? Anyway, in terms of finance, I like to always have a ‘plan B’, just in case plan A goes horribly wrong. I’m pretty confident that asset diversification is a good idea, because I don’t know which asset classes are going to perform the best in years to come. Furthermore, I’m quite persuaded that market timing (exiting an investment when it is falling in value), makes sense. Many commentators suggest that market timing is not possible for the average investor. My ‘plan A’ obviously disagrees with this. Because of this, I also have a ‘plan B’ that is an asset allocation approach that does not use timing. This portfolio is based on the work of Harry Browne, the creator of the ‘Permanent Portfolio’, and is kept completely separate from my trend-following portfolio. The asset classes that I use are also somewhat different:

  1. Developed equities

  2. Emerging markets

  3. Property

  4. Gold/commodities

  5. Bonds

  6. Cash

The idea is to be fully invested in all of these asset classes at all times, and then periodically rebalance in order to ‘buy high and sell low’ and keep each investment roughly in line with the others.If you want to know more about this sort of approach, read Browne’s classic book: ‘Fail-safe Investing’. So how has it done over the past year? I told you in my blog post last week that my trend-following portfolio that uses market timing returned 16.3% over the past year. Well, my ‘plan B’ portfolio returned 21.7%! Does this mean that ‘plan B’ is better than ‘plan A’? Does it mean that market timing doesn’t work? Maybe. Maybe not. My trend following system will help to keep me out of markets that are crashing. My plan B system will not. Time will tell what works best over the next few decades……. Here is a video with my thoughts about the different asset classes as of this weekend: [embedyt][/embedyt]


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