How to Invest in the Stock Market and Beat 80% of All Investors

First of all we only allocate 25% to stocks to our Permanent Portfolio. The Permanent Portfolio uses four different asset classes and we initially limit our exposure to 25% in each asset class. Then we rebalance the whole portfolio when any asset class hits a 35% or 15% rebalancing trigger. Stocks are our hedge for prosperity but we also have hedges for inflation, deflation and recession in our Permanent Portfolio. The different asset classes we use are stocks, bonds cash and gold and these asset classes respond differently depending on what is happening in the economy. So using a Permanent Portfolio we will always have at least one asset class that is doing well. The Permanent Portfolio has gained over 8% per year compounded over the last 40 years with low volatility.

Here are the specifications for investing in stocks for our Permanent Portfolio:

  1. We avoid individual stocks due to their risks and the trading costs involved. Company stock is also an individual stock so we limit our risk exposure there as well. We also eliminated the need to do individual company research and stock selection which frees up a lot of our personal time to do the things we enjoy. The Permanent Portfolio is true low maintenance.
  2. We also avoid actively managed mutual funds because over 80% of them can’t even beat their benchmark index like the S&P 500.
  3. We want to use a market cap weighted total stock market index fund with low fees. Since there are so many companies represented in these funds, we get great diversification and lower risk than single company stocks. Since little trading is going on in the fund we also get great tax efficiency.
  4. Any dividends received from our fund we allocate to our Cash allocation so we turn off any dividend reinvestment plans (DRIPs). This is consistent with our Permanent Portfolio strategy of buying assets low and selling high.

If you live in the U.S. you may want to explore using exchange traded funds which have low fees. Some of these exchange traded funds you can even buy and sell commission free at some of the discount brokers. I have listed a few exchange traded funds here but there are others available from Schwab and Fidelity for example. There are also regular total stock market mutual funds available if you prefer. If you live outside of the U.S. there is total stock market funds available in your country as well.

U.S. ETF Examples:

  • Vanguard Total Stock Market Index fund (VTI) with a management expense ratio (MER) of only 0.05%
  • iShares Russell 3000 Fund (IWV) with an MER of 0.20%

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