Chaos Resistant Portfolios
How to build a 100-year portfolio
Market Sentiment delivers data-backed, actionable insights for long-term investors. Join 50,000 other investors to make sure you don’t miss our next briefing.
We found something interesting when we ran a risk assessment survey for Market Sentiment readers.
When asked to judge what they thought their risk profile was, here’s how the distribution looked:
45% aggressive
42% moderate
13% conservative
But based on results from the survey:
Only 16% were aggressive investors
80% was moderate
4% conservative
If you are new here, you can check your risk profile by taking the quiz.
The gap is because investors often misjudge their own risk tolerance. We tend to overestimate our ability to handle risk during bull markets. The problem is that during the good times, only the upside is visible.
The correct way to think about risk is that in order to attract capital, riskier investments have to offer the prospect of a higher return — not a guarantee of a higher return.
That brings us to what happened last month. We saw one of the most volatile moves in the stock market over the past few years. The S&P 500, which was chugging along just fine, underwent a massive 12% drop in one week due to Liberation Day Tariffs.
It seemed like the end of the world when Trump announced the tariff, and just a month later, we are going on as if everything is business as usual. While the long-term impacts are yet to be seen, these crises are happening at an alarming frequency. The Moody’s downgrade and the rising interest rates seem to be next.
While our buy-the-dip strategy worked flawlessly with the market now up 17% from its lows, not everyone can stomach this volatility. Following the 2008 financial crisis, 57% of U.S. household investors reduced their equity holdings. This decision to lower equity holdings after a steep market decline ensured that they solidified their market losses and missed out on the subsequent recovery.
Ultimately, panic selling and trying to time the market during crises result from taking more risks than you are comfortable with. This is why if you are a moderate investor, building a portfolio that can resist anything is vital — It’s the sleep well approach to investing.
Here are four chaos-resistant portfolios that can survive anything the markets can throw at them (With how to implement them using ETFs):
1. Ray Dalio’s All-Weather Portfolio
Ray Dalio started working on creating a passive portfolio with a simple goal — It should do reasonably well 20 years from now without attempting to predict anything about the future. It would take Ray and his team 25 years of learning to perfect the all-weather strategy. But the portfolio they created was able to achieve the same return as the global stock market while having 1/3rd the risk.
His insight was simple.