When you invest in the stock market, your portfolio strategy is crucially important. Your strategy dictates what you buy to give you the best chances of meeting your goals, and adjusts as those goals change.
For investors nearing retirement or with a short-term time horizon, a portfolio strategy that’s designed to limit exposure to volatility is an absolute must, and there are several great options out there.
One of the best prebuilt portfolios for this type of investor is known as the Gyroscopic Desert portfolio. The portfolio tilts toward fixed-income investments, helping to limit downside risk while offering exposure to the gains the stock market has to provide.
What Is the Gyroscopic Desert Portfolio?
The Gyroscopic Desert Portfolio, also known as the Gyroscopic Investing Desert Portfolio, was developed by a member of the Gyroscopic Investing forum. It’s a lazy portfolio, designed for simplicity in setup and management, requiring investors to only invest in three different index funds or exchange-traded funds (ETFs).
Of course, with so few funds in the portfolio, each of these investment-grade funds should include heavy levels of diversification and represent a different asset class.
The fund is similar to the Harry Browne Permanent Portfolio, with the key differences being limited exposure to gold with increased exposure to the United States equities market.
While the Gyroscopic desert portfolio has become popular among investors, some question the asset allocation, saying it lacks sufficient diversification and strategy, specifically in terms of a lack of international exposure and risk premium factors. Nonetheless, the portfolio has a strong history of producing compelling returns while limiting risk.
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Portfolio Asset Allocation
The Gyroscopic Desert Portfolio is one of the laziest of lazy portfolios, only prescribing investments in three ETFs that provide exposure to three different asset classes:
- 30% in Diversified U.S. Stocks. The portfolio strategy calls for 30% of your allocation to be nested in an investment-grade fund that offers access to a diversified list of U.S. stocks. These stocks should range in market caps and sectors, giving you access to all that the domestic stock market has to provide.
- 60% in Intermediate-Term Bonds. The majority of the portfolio’s allocation is centered in intermediate-term bonds. While the portfolio strategy doesn’t specifically dictate whether these should be Treasury bonds or corporate bonds, most investors who employ the strategy take the Treasury route. This can also be achieved by investing in a diversified ETF.
- 10% in Gold. Finally, the portfolio calls for investments in gold, a long-standing safe haven and hedge against inflation.
The Investment Thesis Behind the Portfolio
The investment thesis behind the Gyroscopic Desert Portfolio is relatively simple to understand. Its creator obviously sees value in taking the less-work-better-results approach by keeping the portfolio as simple as possible. However, many investors ask: Where’s the diversification?
The fact is that there’s plenty of diversification here since the equity ETF allocation calls for total stock market coverage. Not to mention, diversification is designed to provide protection, and with 60% of the portfolio’s total allocation invested in highly stable Treasury debt securities, the protection is definitely there.
There are some intricacies here that tell you a bit about who the portfolio was designed for.
First, there’s a heavy fixed-income tilt in the portfolio, with the asset class representing more than half of the portfolio’s asset allocation. The portfolio was obviously designed to greatly limit drawdown risk and exposure to volatility.
There’s a bit more to the fixed-income holdings too. It’s common in prebuilt portfolios with heavy fixed-income allocation to take a barbell approach, investing half of the bond holdings in long-term bonds and half in short-term bonds, netting an intermediate term. This portfolio strategy skips that step by investing entirely in intermediate-term bonds to start with.
Finally, the gold allocation in the strategy is also important. For some time now, gold has been used by investors to offset inflation-related risks. After all, when the value of the dollar falls, the price of gold tends to rise, offering even more stability within the portfolio.
Pros and Cons of the Gyroscopic Desert Portfolio
In the world of finance and investing, there’s no such thing as perfection. Every decision you make comes with its pros and cons, including the decision to follow the Gyroscopic Desert Portfolio strategy.
Gyroscopic Desert Portfolio Pros
There are several reasons so many investors have decided to use this portfolio strategy in their own investing activities. Some of the most exciting include:
- Simple Setup and Management. When using this strategy, you’ll only be investing in three assets, making it one of the easiest to set up. Moreover, the low asset count and heavy diversification within the included assets means management is easy as well. Perhaps the only prebuilt portfolio that’s easier to manage is the Scott Burns Couch Potato Portfolio — which includes only two assets, rather than three.
- Low Risk. In terms of prebuilt portfolios, the Gyroscopic Desert Portfolio is one of the lowest risk options you’ll find. Most of the allocation is invested in fixed-income securities and gold, both of which are popular safe-haven investments. With only 30% of the portfolio invested in equities, the risk of significant drawdowns is greatly reduced.
- Surprising Returns. Usually, when investing in a safe-haven tilted portfolio, you can expect your portfolio’s compound annual growth rate (CAGR) to be significantly lower than market averages. However, that’s not the case here. If you backtest the portfolio, you’ll find that it has a slightly lower performance than the S&P 500; those returns are jaw-dropping for a safe-haven-centric investing strategy.
Gyroscopic Desert Portfolio Cons
Although the Gyroscopic Desert is a safe portfolio that’s known for exceptional performance when compared to its peers, there are some drawbacks that should be considered before diving in:
- Safe Allocation. As mentioned above, 70% of the portfolio’s asset allocation is invested in safe havens. That’s not bad if you have a shorter time horizon or limited appetite for risk, but most investors are willing to accept higher risk in return for potentially higher returns. As such, the safe-tilted allocation will be a turn-off for some.
- You Won’t Beat the Market. Sure, historically the portfolio has produced gains that tracked just below the S&P 500 index, but don’t expect to beat the market using it. If your goal is to generate gains that outpace the S&P or any other mainstream benchmark, you’ll want to look elsewhere.
Who Should Use the Gyroscopic Desert Portfolio?
When diving into prebuilt investment portfolios, you’ll find there’s no such thing as a one-size-fits-all option. Every investor has a unique risk tolerance and unique goals. Therefore, there’s no way that a single portfolio could address the needs of every investor perfectly.
However, the Gyroscopic Desert Portfolio is unusual in that while most portfolios are designed for a small group of like-minded investors, this one has broader appeal. Many types of investors could benefit from the portfolio due to its ability to produce meaningful gains while limiting risk in a big way, even if it takes a little customization (outlined below).
Investors Who Like Investing In Investment-Grade Funds
No prebuilt portfolio gives you complete control because they are all centered around investing in index funds and ETFs. By investing using the Gyroscopic Desert model, or any other prebuilt portfolio, you’re giving up control in two ways:
- Investment Picks. Investment-grade funds pool money from large groups of investors and invest the money they receive based on their stated strategy. When investing this way, you’ll have no control over the individual stocks within your portfolio.
- Voting Rights. Shares of common stock come with voting rights. These rights are important when big decisions surrounding management compensation, acquisitions, and other significant business decisions need to be made. When investing in investment-grade funds, you’ll hand your voting rights over to the fund manager, meaning you won’t have a say in any of these important business matters.
Although this may be a turn-off to the investors who want complete control, for the vast majority of people, it’s an easy trade-off because research, picking investments, and making tough decisions that could have a profound effect on your returns is handled by Wall Street executives.
Investors Who Want Stable Growth and Reasonable Returns
The past performance of the Gyroscopic Desert Portfolio has been impressive, tracking just below the major U.S. market benchmarks, but there are very few points throughout history when the portfolio beat these benchmarks.
On the other side of the coin, the portfolio has experienced significantly lower drawdowns throughout history. As a result, what you end up with is a stable portfolio with more steady growth.
If your goal is to beat the market, investing based on a safe-haven-tilted strategy is a mistake. Not to mention, it’s impossible to beat the market when you are the market. However, if you’re more interested in a stable approach centered around safety that also has the potential to generate meaningful gains, this is the strategy for you.
Investors Who Want Find Solace in Diversification
Diversification acts as insurance in the stock market. Without it, your portfolio could experience significant drawdowns if a single stock or sector were to take a dive. On the other hand, managing a heavily diversified portfolio is tough work.
Investment-grade funds, like those that make up this portfolio are naturally diversified with investments chosen by Wall Street pros.
Investors Who Prefer Safety to Maximized Returns
Finally, there’s absolutely no factoring involved in this portfolio. Factoring is a relatively new concept whereby index investors take indexing to the next level by investing in funds that come with factors known to pay a risk premium. Some of the most common of these factors include:
- Company Size. Throughout history, the size of a company has played a role in its ability to grow, with smaller companies having more of a runway than larger companies. Therefore, small-cap stocks have historically outperformed their large-cap counterparts over the long run.
- Value. Companies with low valuations and strong profitability are considered to be discounted in the market. These stocks, known as value stocks, have historically outperformed growth stocks over long time horizons.
- Emerging Economies. Finally, emerging economies can be risky but are often characterized by rapid growth, meaning the companies within them benefit from that growth.
However, as the term risk premium suggests, access to the potentially higher gains comes with the risk of potentially larger losses. If you’re not interested in taking on those risks, the Gyroscopic Desert Portfolio is for you.
How to Duplicate the Gyroscopic Desert Portfolio
There are only three assets involved in the portfolio, making it simple to duplicate. However, considering its lack of international and small-cap value exposure, you may want to do some tweaking. Here are three different renditions of the Gyroscopic Desert Portfolio to consider:
The Traditional Gyroscopic Desert Portfolio
The traditional Gyroscopic Desert Portfolio is simple to recreate using three low-cost investment grade funds:
- 30% in Vanguard Total Stock Market Index Fund ETF (VTI). The VTI fund was designed to provide exposure to the entire U.S. stock market, including stocks of various market caps, sectors, and regions across the country.
- 60% in Vanguard Intermediate-Term Treasury Index Fund ETF (VGIT). The next part of the prescribed allocation is intermediate-term bonds. One of the best ways to gain that exposure is an investment in VGIT, a fund centered around investing in U.S. Treasury bonds with maturities ranging from three to 10 years.
- 10% in iShares Gold Trust (IAU). Finally, the portfolio calls for 10% of your investment dollars to be invested in gold. The IAU fund provides exposure to gold by tracking the price movements of physical gold, also known as gold bullion.
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The International Gyroscopic Desert Portfolio
One of the biggest drawbacks of the Gyroscopic Desert Portfolio is that it doesn’t give any allocation to international stocks, leading to investors missing out on emerging market opportunities and growth in developed economies outside the U.S.
The good news is that you can gain the international exposure the portfolio lacks with one simple adjustment.
To do so, cut your exposure to the VTI fund in half to 15%. Invest the remaining 15% allocation in the Vanguard FTSE All-World ex-US Index Fund ETF (VEU). The fund invests in both developed and emerging economies around the world, with the exception of the United States. This provides diversified exposure to international opportunities across various sectors, market caps, and regions.
The Small-Cap Value Gyroscopic Desert Portfolio
Another option is to give the portfolio a small-cap value tilt, which will be appealing to many investors for multiple reasons.
- Performance. Small-cap and value are both factors known to generate increased returns when compared to large-cap and growth counterparts. By mixing the equity allocation up to tilt toward these factors, you can greatly increase your portfolio’s overall potential performance.
- Adjusting Risk. The Gyroscopic Desert Portfolio was designed significantly to limit risk and does so by limiting your exposure to equities to just 30%. With so little exposure to equities and a heavy tilt toward safe-haven assets providing stability, most investors can afford to increase the risk in their equity holdings in order to generate larger returns.
There are two ways to go about adding a factor tilt to your portfolio: either get rid of your holdings in the VTI entirely or cut them in half to 15%. With the remaining allocation, invest in the Vanguard Small-Cap Value Index Fund ETF (VBR). The VBR fund is made up of smaller companies with value characteristics, suggesting they’re undervalued compared to their peers and have significant room for growth.
Maintain a Balanced Portfolio
Whether you’re investing using the Gyroscopic Desert Portfolio or another portfolio strategy, it’s important to take the time to keep your portfolio in balance. After all, these portfolios were designed with thoughtfully chosen assets that provide both exposure to market gains and risk management.
However, over time, the values of assets in your portfolio will change, some at faster rates than others. As a result, your portfolio is likely to fall out of balance from time to time, leaving you overexposed to risk or underexposed to potential rewards.
There’s a simple way to fix this problem.
Successful investors regularly rebalance their portfolios, selling portions of assets that have become overexposed and investing those freed up funds in the assets that have become underexposed.
The good news is that you’re not going to have to do this often with the Gyroscopic Desert Portfolio. In fact, weekly, monthly, and even quarterly rebalancing are largely unnecessary with this profile. Nonetheless, you will want to take the time every six months to a year to make sure that everything is still in line, and rebalance your portfolio if you find that not to be the case.
Final Word
All told, the Gyroscopic Desert Portfolio is a compelling option for a wide range of investors. While the portfolio strategy lacks the use of factoring and only diversifies between three assets, historic trends show that the strategy provides a meaningful return while significantly decreasing drawdown risk.
Nonetheless, while the portfolio has been a strong performer historically, past performance isn’t always a perfect predictor of future results. As always, it’s important to do your research and get a detailed understanding of what you’re buying before you buy any financial products, including the ETFs prescribed in this asset allocation strategy.
Source: moneycrashers.com