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):
| Asset | Return | MaxDD | Return/MaxDD |
| US Stocks | 6.99% | -79.00% | 8.85% |
| Foreign Stocks | 4.88% | -78.00% | 6.26% |
| Gold | 1.73% | -42.00% | 4.12% |
| US 10Y Bonds | 2.16% | -61.00% | 3.54% |
| For 10Y Bonds | 1.80% | -78.00% | 2.31% |
| Cash T-Bills | 0.50% | -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 th