Planning your investment portfolio for retirement is a tricky business. You know you need one, but chances are government will be slim or non-existent during your twilight years. Moreover, who knows what state the economy will be in when you decide to give up work? How can you plan for all the shocks, booms and busts that might hit the financial markets further down the line?
Luckily, there’s a way round this. Meet the ‘cockroach portfolio’ which, just like its namesake, will survive whatever’s thrown at it.
The cockroach portfolio idea was devised by Dylan Grice, then lead strategist at investment bank Société Générale. He outlined it in a 2012 piece for the bank, The Last Popular Delusions: Cockroaches For The Long Run!
He looked at the traditional balanced portfolio of 60% stocks and 40% bonds and noticed that they’re vulnerable to a lot of market shocks, particularly inflation, which destroyed the values of many a portfolio in the 1970s.
The last 20 years have also been a time of wild ups and downs, where the right split-second decision or prediction can either pay off handsomely or wreck your profit. So wouldn’t it be better, Grice thought, to relax a little – and have a portfolio that will just sit there, taking whatever the market throws at it?
Grice reasoned that diversification is key, and that a portfolio split equally four ways between government bonds, cash, high-yield equities and gold is strong enough to weather the most challenging market conditions.
To test this, he put together such a portfolio, and looked at how it would have performed since the 1970s, taking in the two major downturns in 2000-3 and 2007-9. And it survived pretty well, producing average investment returns of about 5% a year, in excess of inflation.
Simple but effective
In an age where investment has become increasingly complex, it sounds too simple to work. But experts say that the cockroach portfolio approach has a lot going on for it not to be recommended.
As Bob Maynard, Chief Investment Officer at the $14.7 billion Public Retirement System of Idaho points out in his paper Managing Risk in a Complex World, a cockroach lives in a highly complex environment but it has only one way of defending itself. It runs in the opposite direction from a puff of air.
“The equivalent for the investment world is, at the core, a very simple structure founded upon public market diversification with one basic defense mechanism: see a volatile movement, react in the opposite direction (i.e. rebalance into it),” he writes. “A simple structure and strategy, if adhered to, has one of the best chances of surviving for many decades.”
Take each element of the cockroach portfolio together and you’ll see the reasoning behind them is sound. It’s designed to protect against as many different financial risks as possible.
Gold has traditionally been a safe haven for thousands of years for a very good reason. It’s a tangible thing that holds fast against inflation, currency depreciation and financial collapse. And thanks to apps like Goldex, it’s now easy to buy and sell at the touch of a button.
Your personal savings, which make up the cash element, will protect you if the market collapses: just make sure they’re in safe banks and that you spread the risk across various financial institutions if necessary. (In the UK, the Financial Services Compensation Scheme (FSCS) will pay out a maximum of £85,000 per institution if the bank goes bust, not per account held with that firm.)
Holding 25% in solid government bonds will help protect your portfolio against deflation, while high-yield equities give you the chance to achieve capital growth and earn income.
Of course, cockroaches aren’t the most exciting of creatures – and the cockroach portfolio may not seem particularly exciting. But, as Grice himself points out in his original piece: “Ingeniousness is over-rated. Cockroaches may not be able to build nuclear bombs, but they can withstand nuclear war. They survive.”
“Don’t get me wrong. Thriving is great. Prospering isn’t bad either. But neither mean much if you’re unable to survive. To my mind, therefore, capacity to survive has to be the starting point when thinking about success.”
Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this it does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.