Studies of Life

Learning by doing.

A 30% Stabilising Slice in My Piotroski Portfolio

05 October 2014 by Jim

The last change I made to my portfolio last month was adding a 30% piece invested as a stabilising mechanism to weather difficult periods, crises and crashes. Until now I’ve been fortunate enough to never experience a real crash, mainly because I’ve only been investing in stocks since the beginning of 2013, but that’s the point: You need to prepare for the worst when you have the means of doing so, not when it’s too late. Because crashes will happen. And that’s fine by me.

So what is a stabilising piece, in my case? It’s an investment in long-term bonds, short-term bonds and gold. All three of those tend to not move the same way that stocks do, but rather in opposite direction. Gold is especially strong in crises, and bonds do not lose their value in crashes like stocks do because they are not stakes in a company but loans that have to be paid back no matter what happens.

Which instruments did I choose? I used DBXP for short term bonds, DBXG for long term bonds and XAD5 for gold. These are two ETFs by Deutsche bank and one ETC that tracks the price of physical gold. The bonds are exclusively European government bonds. Since I’m based in Europe I chose local bonds rather than international ones. Additionally, these two ETFs reinvest the coupon payments rather than distributing them, so it’s basically like a stock that goes up without ever really going down. This makes sure I don’t have to pay taxes on the capital gains if I hold the ETFs for at least 6 months. (In Luxembourg, the return from an investment held for more than 6 months is tax free.)

Europe bond ETFs / long term and short term

(I do not know why the DBXG jumped in value in 2014, but I’ve re-checked the net asset value, i.e. the value of the underlying bonds compared to the price of the ETF, and it’s very close to the price so there’s nothing irregular there.)

Now in case a crash does happen sometime in the future, I will still lose money since 70% of my portfolio is in stocks, but the loss will be strongly counteracted by the bonds and the gold.

The gold as such has no long term value to me: in my opinion it doesn’t have any real value and there is no guarantee it will go up in value in the future. So why am I holding it? I hold it because  there is a good chance that it will spike in price when a crash occurs, as it did in 2008:

Gold VS stocks 2008
Additionally, it is pretty volatile, and this is useful for rebalancing: if gold rises a lot when my stocks fall, I will be able to sell gold at the end of the year to buy cheap stocks. Without the gold stake, there would be no money at that point to buy low priced stocks.

A bond / gold holding will inevitably reduce your overall returns but if that can take most of the sting out of crashes then it’s worth it to me.

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