How to invest in the stock market and beat 80% of all investors

First, we allocate only 25% to the stocks in 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 entire portfolio when any asset class reaches a 35% or 15% rebalancing trigger. Stocks are our cover for prosperity, but we also have coverage for inflation, deflation and recession in our permanent portfolio. The different asset classes we use are stocks, cash and gold bonds, and these asset classes respond differently depending on what is happening in the economy. Therefore, using a permanent portfolio, we will always have at least one asset class that handles well. The permanent portfolio has gained over 8% per year compounded in the last 40 years with low volatility.

Here are the specifications for equity investments for our permanent portfolio:

  1. We avoid individual stocks due to the risks and trading costs involved. The company’s shares are also individual shares, so we limit our risk exposure there as well. We have 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 a real low maintenance.

  2. We also avoid actively managed mutual funds, as more than 80% of them cannot even exceed their benchmark, such as the S&P 500.

  3. We want to use a fully weighted stock market index fund with a low commission. Because there are so many companies represented in these funds, we have a high diversification and a lower risk than the shares of a single company. Because small transactions take place in the background, we also get high tax efficiency.

  4. We allocate any dividends received from our fund to our cash allocation so that we disable any dividend reinvestment plans (DRIPs). This is in line with our strategy of permanent portfolio of low asset purchase and high sale.

If you live in the US, we recommend that you explore using exchange-traded funds at low fees. Some of these funds traded on the stock exchange you can buy and sell free commission to some of the discount brokers. We have listed some funds traded on the stock exchange here, but there are others available from Schwab and Fidelity, for example. There are also total mutual funds available on the stock exchange if you prefer. If you live outside the US, there are total funds available on the stock market and in your country.

Example of US ETF:

  • 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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