Let’s ignore how disgusting cockroaches are for a second. Let’s also forget how much fear they instil in us when they take flight. The thing is, if you think about it, cockroaches are impressive creatures.
For instance, cockroaches have been around for more than 300 million years, making them one of the oldest groups of insects on Earth. Imagine how resilient and adaptable you’d have to be to survive through so many extreme environments. Plus, they’re still around, not even remotely close to extinction.
Now that’s how resilient and adaptable we want our portfolios to be right, no matter the weather?
The portfolio for any (economic) weather
The normal approach to investing would be allocating 60% of your holdings into equity and 40% into debt investments. However, this ratio can be rocky when inflation is not under control. The reality is, these days, the market is starting to get volatile. There’s where the Cockroach Portfolio comes in.
How does it work? First, you would want to place your money evenly across four types of assets: Equities, Gold, Cash and Bonds. These four types of assets are picked according to how well they perform for each ‘weather’, these include: Growth, Inflation, Deflation and Recession. By picking the assets which do well in each economic weather and rebalancing them, we create stability in volatile situations.
What’s the catch? Yes, your portfolio will be relatively stable but don’t be expecting any high returns. Remember, high risk equals high returns, and the Cockroach Portfolio isn’t exactly high risk.
During Growth - Use Equities:
When the economy is doing well, like when people start spending more money, businesses, in turn, will make more money too. Stocks, which are tiny pieces of ownership in these businesses, can become more valuable during this time. So, if you own stocks, you can see the value of your investment go up.
Additionally, when companies are making more money, they might share some of this profit with you in the form of dividends, which is like getting a little bonus just for owning the stocks.
During Recessions - Use Cash:
When lots of people are losing their jobs and businesses aren’t doing too well, it’s a good idea to have some cash saved up. Cash is great because it doesn’t lose its value during recessions, and it’s always ready to use.
During Inflation - Use Gold:
When there’s inflation, the value of money goes down. This means you’ll be buying less with the same amount of money. Gold, however, often keeps its value better than money during inflation.
So, when prices are rising and money buys less, gold can still buy about the same amount of things, or even more. That’s why people sometimes buy gold when they think inflation will hit.
During Deflation - Use Bonds:
When there’s deflation, prices of goods and services decrease, which means your money can buy more than before. Bonds pay fixed interest, so if you own bonds during deflation, the money you get from them can buy more because of the lower prices.
The Bottom Line
The Cockroach Portfolio is best suited for beginners in investing. It’s a great strategy to manage your risk and enjoy stable returns. The core concept is diversifying our risk throughout different times. However, this doesn't mean you should avoid making adjustments, unless you're content with sticking to a "cockroach" strategy indefinitely.
Adaptability through economic cycles is like riding a wave, and we have to stay alert and aware of it. After a few years of experience in the market, you can change the asset allocation based on the economic weather and have greater returns periodically rather than just a steady line.
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