The End-of-the-World Portfolio… Is it Too Early to Have One?

by Alexander Green, Chief Investment Strategist

Wednesday, June 9, 2010: Issue #1277

First one friend called. Then another. And then yet another.

Now their friends are calling me, too, asking about my “End-of-the-World Portfolio.”

So I’ve decided to just go ahead and tell everyone about it.

All the friends who called – and their friends, too – are well-educated businessmen. They’re convinced that not only the United States government, but also the governments of Europe, Britain and Japan have simply lost their tether.

We’ve all seen deficit spending before. It’s been a problem for decades. But nothing like this…

Putting the Eye-Popping Numbers into Perspective

The unfunded liabilities for Social Security, Medicare and Medicaid alone now top $108 trillion.

Of course, that number is too large to mean anything to most of us. It’s only when you bring it into context that it becomes alarming.

The $108 trillion is approximately $815,000 per U.S. taxpayer. (And this is just the projected shortfall in Social Security, Medicare and Medicaid. It has nothing to do with the rest of the federal debt, which tops $13 trillion.)

Entitlement spending in other parts of the world is an even bigger problem. And the federal deficits are even more gargantuan. In Japan, for example, debt as a percentage of GDP will hit 200% this year.

Many of my friends look at the fiscal problems in Greece – that necessitated a $1 trillion bailout from the European Union – as just a warning shot across the bow. They’re concerned that things are only just beginning to unravel and will get considerably worse.

Are they right? Only time will tell. But here’s what they keep telling me…

Are You At the Mercy of Wasteful Governments?

“Alex, I busted my hump to earn this money. I’ve paid taxes on it. I’ve saved it instead of spending it. I’m not going down with the ship if those boneheads in Washington spend us into oblivion. How do I protect myself?”

Let me begin by saying that I’ve listened to apocalyptic economic forecasts for decades now. Putting all your money in gold bullion, freeze-dried food and shotgun shells hasn’t been a particularly auspicious strategy.

The difference here is that these folks aren’t gloom-and-doomers who have droned the same message for over 30 years. They are ordinarily optimistic folks who think Western governments are driving the world economy down the road to ruin.

The knock against democracy in Greece and Rome a few thousand years ago was that once the electorate realized they could use their representatives to loot the Treasury, all would be lost. Lately, that remark is looking prescient.

As one friend summed it up: “Look, Alex, I don’t care if I’m wrong about Armageddon and my returns turn out to be lower than what they might have been. Just tell me what to do so I can hang on to what I’ve got and maybe match or beat inflation by a little bit.”

How to Allocate Your Assets in the “End-of-the-World Portfolio”

With that modest goal in mind, here is my suggestion if you want to hunker down for the end of the world – a posture that admittedly may be premature.

  • Put 40% of your liquid portfolio in a laddered portfolio of AAA-insured, tax-free bonds. (Be sure to buy state-specific bonds if you’re in a high-tax state.)
  • Put 40% in a laddered portfolio of inflation-adjusted Treasuries, also AAA-rated. (For tax reasons, these are best owned in your retirement account.) This is your protection against inflation, as Uncle Sam might opt to spend us out of a tight spot with interest rates already near zero.
  • Put the remaining 20% in defensive, blue-chip, dividend-paying stocks. I’m referring to food companies, healthcare companies, utilities, defense contractors, gold mining companies and the like. This should provide some growth and income.

Why include stocks at all? Because 200 years of history shows that an 80/20 split between stocks and bonds is actually less risky than a 100% bond portfolio.

On a personal note, I would not invest my own money this way. (At least not yet.) I’m not calling for the end of the world.

But my friends seem grateful just to have a clear-cut plan. One of them even concedes that it’s not his “End-of-the-World Portfolio”: “I tell people it’s my “Cup-Your-Groin Portfolio.”

I suppose it is. I only hope our elected misrepresentatives get the message before we all need one.

Good investing,

Alexander Green

Investment U - What's It Mean?

Laddering means varying your portfolio between short-, medium- and long-term bonds. This is your protection against deflation and the virtual certainty of higher taxes.