The Armageddon portfolio

John Osbon - November 16, 2011

Two clients have recently requested an Armageddon portfolio from Osbon Capital, a portfolio designed to withstand and possibly even profit from horrible events yet to occur.

Why would anyone want such a portfolio, and what does it look like?

It is not too difficult to dream up a doomsday scenario that would lead to true investment chaos. Armageddon could mean a prolonged global recession or depression, deflation or hyperinflation, national defaults, worthless currencies, systemic breakdown, nuclear war. There’s no shortage of potential cataclysms – no matter how unlikely they may be – any of which could lead to widespread repricing of assets worldwide.

Survival is the goal

Under Armageddon, the prospect of beating the market – the traditional sales pitch of many investment professionals – becomes irrelevant.  Return OF capital, not return ON capital becomes paramount.  The winner withstands Armageddon with his or her capital more or less intact while the masses watch their assets dwindle or disappear altogether.

There’s some instinctual appeal to preparing for the worst, but there are problems too.

First, not all Armageddons are created equal. The Armageddon portfolio you might assemble to survive 100 percent interest rates is not the same portfolio you would want during a prolonged deflationary depression. To safeguard your assets against doomsday, you must first guess the cause of everything falling apart.

Second, finding “safe” investments is more difficult than it sounds.  Everyone knows that cash and gold are safe. Except when they’re not. Inflation can quickly erode cash’s only real value: purchasing power. And there’s nothing magical that makes the price of gold only go up. After a quick run up, gold fell from $700 to $300 per ounce in the early 1980’s and did not return to $700 for 25 years. Safe investments can and do lose value.

Third, there is opportunity cost. By fleeing from stocks, for instance, to “safer” assets like cash or gold, you could completely miss a long and rewarding bull market in equities. Think of the many scary headlines of the last half century or so. Anyone scared out of stocks by dire predictions would have missed out on the 5200 percent total return of the Dow Jones Industrials between 1971 and 2011 (see our post).

Fourth, when is it over? This is the flip side of the opportunity cost issue. Creating an Armageddon portfolio during a period of fear and volatility begs the question: when is it safe to get back in the water?  I’ve often written about the perils of market timing, and trying to time the all-clear for Armageddon is certainly no easier.

Goal-based asset management

All that being said, the reason we practice goal-based asset management is simply this: it’s not about everyone else, it’s about you, your family, and your goals. At Osbon Capital we are ready to help you create a portfolio that positions you to meet your specific goals, from short-term preservation of capital to funding a fulfilling retirement decades down the road.

Goal-based management is completely customized, service-intense, and can’t be replicated or scaled for masses of people. You set the goals and we help you reach them.

(For more reading on this topic, consider Barton Biggs’s Wealth, War, and Wisdom. In his Armageddon portfolio, he includes a remote farm or ranch stocked with food, seed, fuel and ammunition. It is not a fun read.)

 

 



This article may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.

Nothing in this article is intended to be or should be construed as individualized investment advice. All content is of a general nature. Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice.

Any references to third-party data or opinions are listed for informational purposes only and have not been verified for accuracy by the Adviser. Adviser does not endorse the statements, services or performance of any third-party vendor without specifically assessing the suitability of a third-party to a client’s or a prospective client’s needs and objectives.

DJIA returns, based on data from July 25, 1971 to July 25, 2011, include price appreciation and dividends.

An investment cannot be made directly in an index. Returns for Dow Industrials do not reflect transaction costs.

Past performance is not an indicator of future results.

 

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