Even some of the smartest people can make foolish financial decisions.
I can calculate the motion of heavenly bodies, but not the madness of people.” – Sir Isaac Newton
Isaac Newton revolutionized physics but also is famous for losing a fortune in the South Sea Bubble.
Already a wealthy man, Newton was usually a cautious investor. As the year began, much of his money was tucked away in various kinds of government bonds-reliable, uneventful investments that delivered a regular stream of income. He did own shares in a few of the larger companies on the exchange, including South Sea, but he had never been a rapid or eager market trader…
That had changed in the past few months, though, as he bought and sold into the rising market seemingly in the hopes of turning a comfortable fortune into an enormous one. By August, he’d unloaded most of his bonds, converting them and other assets into South Sea shares. Now he contemplated selling the rest of his bonds to buy still more shares…
He did sell nearly all of them. It was a disastrous choice. Within three weeks, the market turned. By Christmas, it had utterly collapsed. Newton’s losses reached millions of dollars in 21st-century money.” – The Atlantic (emphasis added)
Today I wanted to highlight another brilliant man, who let the fear of missing out, or FOMO, get the better of him, with disastrous financial results.
My uncle is the smarter person I know, as his resume attests to:
- Top of his class at Caltech
- Ph.D. from Princeton in advanced molecular modeling
- Worked as a financial quant for Goldman Sachs in London
- Now a senior computer engineer at Alphabet working on deep learning AI
But just like Newton, who was blessed with incredible brilliance and generous wealth, such success can breed complacency and very poor risk management.
In the crypto craze the swept the world following the Pandemic, great fortunes were made, with people turning $5,000 into $5 million in just a few months.
My uncle was caught up in this craze like many others, but rather than invest a few thousand he threw $1 million into crypto.
- $500,000 in UST held at Anchor
- $500K in BTC and ETH earning high yield at Celsius
Well as many of you know, Terra USD, the algorithmic stablecoin, blew up in spectacular fashion, rapidly collapsing to zero.
And Celsius, the largest crypto lender in the world, with $20 billion in customer assets at its peak, became the third large crypto company to file for bankruptcy in the last two weeks.
A few weeks ago, when Celsius froze all customer accounts, due to the equivalent of a crypto bank run, and stinging from the Terra collapse that wiped out $70 billion in total wealth in that ecosystem, my uncle came to me and asked me to help him to salvage his still considerable nest egg.
- He invested 50% of his savings into crypto
- Vs. 1% to 10% recommended range from the expect consensus (Princeton to Marc Cuban range)
- Terrible risk management
- My uncle, the smartest man I know, just lost 50% of his life savings… in a matter of weeks
Having learned the hard way, the pitfalls of rampant speculation, he wanted me to guide him in assessing his risk profile and crafting a reasonable and prudent ultra-sleep well at night or SWAN retirement portfolio.
His goals are far more modest now, no longer swinging for the fences and trying to become a billionaire in the most volatile and speculative asset class in history.
So here’s how I helped my uncle, who is fortunate to have $20K per month he can put to work via high savings in dollar-cost-averaging, build a $1 million dream retirement portfolio.
We named this his Zen Extraordinary Ultra SWAN Income Growth Portfolio, or ZEUS Income Growth portfolio for short.
Let me show you how we applied the principles of disciplined financial science, specifically safety and quality first, and prudent valuation and sound risk management always, to craft his dream retirement portfolio.
One that is 99.12% likely to help him retire in safety and splendor in the coming decades, no matter what happens with the economy or stock market in the future.
My Uncle’s Portfolio Goals
Having tired of hyper volatility after losing $1 million in crypto, my uncle had a few key goals for his ZEUS Income Growth or ZIG portfolio.
- high yield (at least 2X that of a 60/40) 3.2+%
- very safe yield
- long-term income growth that beats inflation
- zero risk of losing all his money over the long-term
- long-term returns equal to or slightly better than the S&P 500 if possible
- but at least better than a traditional 60/40
- very low volatility
- especially during bear markets
- no K1 tax forms (he hates tax complexity with a passion)
- earn back that $1 million in crypto losses (adjusted for inflation) vs a 60/40 by the time he retires at age 70
To me this sounds like every retiree’s dream, and here’s how we built such a truly extraordinary bunker SWAN retirement portfolio.
6 Of The Highest Quality Dividend Blue Chips On Earth For The Ultimate Retirement Portfolio
I’ve linked to articles exploring each of these dividend ETFs/blue chips, including a detailed analysis of their long-term investment thesis, risk profile, growth outlook, valuation, and return potential.
The essence of a ZEUS portfolio is the following ratio of assets:
- 33% index funds
- 33% cash and bonds (or any hedging assets you wish)
- 33% blue-chip companies
Why this ratio? Nick Maggiulli, the chief data scientist for Ritholtz Wealth Management, in his new book “Just Keep Buying,” shows how, over the long term, a 33% bond allocation is optimal for most blue-chip portfolios that want to maximize volatility-adjusted returns.
This agrees with my own research, testing out dozens of combinations of stocks, bonds, and ETFs, to see what is the long-term recession-optimized blue-chip portfolio ratio.
- 30% to 40% depending on the assets
- it even works with 2X or 3X leveraged ETFs (though I recommend avoiding those for several reasons)
Why own bonds at all? My uncle is 40-years-old and has a 50-plus year time horizon. Shouldn’t he be 100% stocks? Mathematically speaking, if all he wanted to do was maximize his wealth, yes.
But remember that he just suffered a $1 million loss that’s emotionally very traumatizing and we’re potentially headed for a recessionary bear market in which stocks could fall between 30% to 48%.
- 10% to 35% more from here
What’s mathematically optimal always takes a back seat to what’s optimal for you personally.
- the No. 1 priority of all successful long-term investors is to avoid becoming a forced seller for emotional or financial reasons
- such as panic selling in a bear market
Why choose bonds as his method of hedging the portfolio?
Because according to a study from Duke University long bonds are the best historical hedging option.
- the best returns in recessions
- and the best positive returns across the entire economic cycle
Since WWII, including during the stagfation of the 1970s, 92% of the time stocks fell bonds were stable or went up.
- 8% of the time soaring interest rates cause both stocks and bonds to fall
- such as in 2022 so far
Why go with EDV instead of ZROZ, the longest duration Treasury ETF?
- higher yield (which is more stable over time)
- higher rating from Morningstar
- lower expense ratio
- similar hedging power (duration) 25 vs 28
What does this mean? Let me give you an example.
- Society General expects long bond yields to fall 2% by the end of the year
- HSCB expects long bond yields to fall to 1.5% at the bottom of the next recession
- if they are correct, EDV will rise 37.5% to 50% in value
Do you know how many hedge funds are able to go up 38% to 50% in a recessionary bear market? Almost none.
Do you know how many hedge funds charge a 0.06% expense ratio? None.
Do you know what EDV’s inflation-adjusted long-term returns are?
- 3.3% yield – 2.5% inflation = 0.8%
How many hedging strategies pay you 0.8% to provide such potent hedging power in even the most extreme market crashes? None.
Why the Nasdaq? It’s true that there are lots of wonderful dividend growth ETFs, and SCHD and VIG are excellent alternatives.
But do you know how many were able to deliver:
- 16% EPS growth in the Great Recession vs -40% S&P
- 10% EPS growth in the Pandemic vs -14% S&P
- 18% long-term dividend growth (since 1999)
- 13.7% consensus long-term total return potential vs 13.5% average annual returns for 22 years
- has outperformed every dividend growth (or growth of any kind) mutual fund or ETF I’ve ever analyzed
The QQQs are not perfect, but they deliver unquestionably excellent income and wealth compounding thanks to being dominated by the world’s most dominant and cash-rich innovation leaders.
QQQ Historical Rolling Returns Since November 2000
Across every time frame, QQQ’s average rolling returns significantly surpass every growth ETF over statistically significant time periods (10+ years).
SCHD offers an unbeatable combination of:
- very safe 3.7% yield
- 12.3% consensus long-term return potential vs 13.4% since November 2011 (inception)
- is one of the only dividend ETFs to beat the S&P 500 in the last decade
- 100 of the world’s best high-yield blue-chips
What about ENB, BTI, and MO?
- MO is the best performing stock in history and an Ultra SWAN quality dividend king that analysts expect to hike its dividend 7% in its 54th consecutive annual increase.
- ENB is the only Ultra SWAN dividend aristocrat midstream, and the most utility-like name in its industry (98% of cash flow unaffected by energy prices).
- The bond market is willing to lend to ENB at reasonable interest rates until 2112.
- The “smart money” on Wall Street literally thinks ENB will outlive us all (including myself and my uncle).
- BTI is an Ultra SWAN quality global aristocrat (23-plus year dividend growth streak) and the growth king of tobacco, with 9.4% growth consensus and rapidly growing reduce-risk products (over 50% annual growth).
- BTI is the largest tobacco company on earth by sales and is rapidly and successfully executing on its plans to eventually generate all sales from RRPs and cannabis.
Each of these companies has historically low volatility, offers a very safe yield of over 6%, and analysts expect 13% to 16.5% long-term total returns.
ENB/MO/BIT Historical Rolling Returns Since April 1990
An Ultra Low-Risk Portfolio
My uncle’s No. 1 priority was that the portfolio as a whole absolutely can’t ever go to zero. And here’s why it can’t.
- note that in the short-term price volatility on any asset can become extreme
- “risk free” bonds have fallen as much as 40% in this bear market (long bonds)
- “risk free” applies only to long-term risk of an asset going to zero (Buffett’s definition of fundamental risk”
EDV is a risk-free asset long-term backed by the full faith and credit of the US government. Does that actually mean risk-free?
- S&P estimates the chance of the US defaulting on its debt in the next 30 years at 0.29% (AA+ stable credit rating)
- Fitch and Moody’s both estimate the risk at 0.07% or 1 in 1,429
The reason that US bonds are “risk-free” assets is simple.
- the US can print its own money
- the only way the US government will default on its debt is if the government ceases to exist
- in which case we’re probably facing an apocalypse and are too dead to care about our portfolios
But do you know what else is actually risk-free, using the same definition?
- the risk of going to zero over the next few decades
Any blue-chip index fund, including QQQM and SCHD.
- both if which own 100 of the world’s best companies
The average blue-chip quality company has a BBB+ credit rating, a 5% fundamental risk of going to zero within 30 years according to rating agencies.
QQQ and SCHD own companies with even stronger balance sheets, A-rated companies (just like the dividend aristocrats).
- 2.5% fundamental risk
The probability of 100 companies, spread out across almost 10 sectors, all going bankrupt is so close to zero, that the only way it can happen is in the same doomsday scenario in which the US government is wiped out and US bonds default.
Later in this article, I’ll literally show you a 1 in 400 economic doomsday scenario and why it’s essentially impossible for blue-chip index funds to go to zero.
So in the case of my uncle’s ZIG portfolio, two-thirds of it is effectively risk-free assets.
What about the three high-yield, low volatility, recession-resistant Ultra SWAN quality dividend aristocrats, ENB, BTI, and MO (a dividend king)?
They are not risk free:
- ENB has a BBB+ stable credit rating: 5% 30-year bankruptcy risk
- BTI has a BBB+ negative outlook credit rating (33% probability of a downgrade to BBB): 5% fundamental risk
- MO has a BBB stable credit rating: 7.5% fundamental risk
The weighted risk of these companies going to zero is 2%.
And 66% of the ZIG portfolio can’t go to zero, barring the literal apocalypse.
- thus, the value of the portfolio can never fall to zero
- even if any of the individual low volatility, defensive, Ultra SWAN dividend aristocrats fail entirely
- and he would sell them long before a complete loss (if the fundamental thesis broke)
What about the overall portfolio’s fundamentals? How do they meet my uncle’s requirements? Just take a look.
Fundamentals To Help You Retire In Safety And Splendor
|Metric||60/40||ZEUS Income Growth||X Better Than 60/40|
|LT Consensus Total Return||6.8%||10.1%||1.49|
|Risk-Adjusted Expected Return||4.8%||7.1%||1.49|
|Safe Withdrawal Rate (Risk And Inflation-Adjusted Expected Returns)||2.3%||4.6%||2.01|
|Time To Double (Years)||31.4||15.7||0.50|
(Source: DK Research Terminal, FactSet)
2.5X the yield of a 60/40, 50% higher consensus annual return potential, 2X the safe consensus withdrawal rate, and half the doubling time of a 60/40 retirement portfolio.
In fact, analysts think this portfolio will potentially match the S&P 500’s 10.3% long-term returns. Except that it’s not a pure stock portfolio but a 67/33 collection of the world’s best blue-chip income-producing assets.
What does that potentially mean for my uncle, who does plan to retire until 70, in 30 years?
Inflation-Adjusted Consensus Return Potential: $1 Million Initial Investment (Assumes Zero Additional Investments)
|Time Frame (Years)||4.3% CAGR Inflation-Adjusted 60/40||7.7% Inflation-Adjusted ZEUS Income Growth Consensus||Difference Between ZEUS Income Growth Consensus and 60/40|
(Source: DK Research Terminal, FactSet)
The current FactSet consensus estimates that over 30 years, assuming no additional investments, (just DRIPing dividends) my uncle’s ZIG portfolio will grow to $4.6 million, adjusted for inflation, $1.1 more than a 60/40 is likely to deliver.
- recouping his $1 million crypto losses and a little bit extra
|Time Frame (Years)||
Ratio ZEUS Income Growth Consensus Vs 60/40
(Source: DK Research Terminal, FactSet)
Potentially resulting in 30% more inflation-adjusted wealth.
OK, so his is all very nice and good, very elegant math, but what evidence is there that this ZIG portfolio can actually deliver long-term returns of close to 10%? And with very low volatility? Especially in bear markets?
Historical Returns Since November 2011 (Annual Rebalancing)
The future doesn’t repeat, but it often rhymes.” – Mark Twain
Past performance is no guarantee of future results, but studies show that blue chips with relatively stable fundamentals over time offer predictable returns based on yield, growth, and valuation mean reversion.
So let’s take a look at the historical returns of my uncle’s ZIG portfolio to see how it’s performed over the last 11 years when 90% of returns were the result of fundamentals, not luck.
Over the last 11 years, this ZIG portfolio delivered 9.4% annual returns with 9.9% average annual volatility and a peak decline of 13.8%.
- 10% better excess total returns (vs US treasuries) dividend by negative volatility (Sortino ratio) than a 60/40
- 3% better Sortino ratio than the S&P 500 (in one of the hottest bull markets in history)
Had my uncle invested that $1 million into ZIG 11 years ago, rather than lose it all in speculative crypto assets, today it would be worth $2.6 million, $300K more than a 60/40 would have delivered.
Adjusted for inflation, that $1 million would have doubled, $200K more than a 60/40 would have delivered.
ZIG’s average rolling return has slightly outperformed a 60/40 across every time frame of the last 11 years.
Helping You Sleep Well At Night When The SxxT Hits The Fan
In the Pandemic crash, a 60/40 fell 12%, and ZIG only fell 6%, 69% less than the S&P 500 and half as much as a 60/40.
- based on its beta the predicted decline was 12%
In this bear market, the worst bond bear market since 1788, a 60/40 is down 17%, the S&P 20%, and the Nasdaq 29%.
ZIG is down just 14%, despite 50% of its assets being crushed.
What about Income Growth Over Time?
Strong And Steady Dividend Growth
Like most bond funds, EDV has a somewhat variable payout resulting in modest annual dividend fluctuations. But overall, it delivers very steady income growth at a rate far above the rate of inflation.
|Portfolio||2012 Income Per $1 Million Investment||2022 Income Per $1 Million Investment||Annual Income Growth||Starting Yield||
2022 Yield On Cost
|ZEUS Income Growth||$49,447||$113,998||8.71%||4.9%||11.4%|
(Source: Portfolio Visualizer Premium)
ZIG managed to keep up with the S&P and Nasdaq in terms of income growth despite being 33% hedged in bonds that never grow their income.
What about future income growth?
|Analyst Consensus Income Growth Forecast||Risk-Adjusted Expected Income Growth||Risk And Tax-Adjusted Expected Income Growth||
Risk, Inflation, And Tax Adjusted Income Growth Consensus
(Source: Portfolio Visualizer Premium)
Analysts expect ZIG to keep growing its annual income at 9% over time, which when adjusted for the risk of companies not growing as expected, inflation, and taxes is 3% real expected income growth.
Now compare that to what they expect from the S&P 500.
|Time Frame||S&P Inflation-Adjusted Dividend Growth||S&P Inflation-Adjusted Earnings Growth|
|1981-2021 (Modern Falling Rate Era)||2.8%||3.8%|
|2008-2021 (Modern Low Rate Era)||3.5%||6.2%|
|FactSet Future Consensus||2.0%||5.2%|
(Sources: S&P, FactSet, Multipl.com)
- 1.3% risk, inflation, and tax-adjusted expected income growth from the S&P 500
What about a 60/40 retirement portfolio?
- 0.5% consensus inflation, risk, and tax-adjusted income growth.
In other words, this high-yield blue-chip portfolio offers:
- almost 2.5x the market’s yield
- almost 2.5X its long-term inflation-adjusted consensus income growth potential
- 6X better long-term inflation-adjusted income growth than a 60/40 retirement portfolio
This is the power of combining blue-chip ETFs, bonds, and blue-chip stocks in this bear market.
But wait, it gets better.
Simulating How ZIG Would Have Performed In The Great Recession
SCHD has only been around since November of 2011, but VYM makes for a reasonable proxy.
SCHD and VYM Since November 2011
SCHD and VYM have similar volatility profiles, with peak declines and annual volatility that are nearly identical.
- SCHD simply yields a bit more and has superior long-term returns.
If we swap out SCHD for VYM and VEDTX (EDV’s institutional older version) then we can get a reasonable approximation of how ZIG would have performed going back to December 2007, right at the start of the Great Recession, the 2nd largest stock market crash in US history.
Behold The Power Of Bonds In Stock Market Crashes
ZIG’s long-term consensus return forecast is 10.1%. Since 2011 it’s delivered 9.4% annual returns and average annual returns of 10.8%.
Over the last 15 years, it likely would have delivered around 10.2% annual returns, just as analysts expect in the future.
Except that since late 2007 it’s not just outperformed 60/40 by 3.4% per year, but also the S&P 500 by 1.5% per year.
The secret is in the low volatility.
- just 10.7% annual volatility despite the 2nd largest market crash in history
- similar to what it’s experienced over the last decade
- peak decline of 16% during the GFC vs 48% for S&P 500 and 21% for a 60/40
- half the peak decline of a 60/40 with a very similar asset allocation during the 2nd worst market crash ever
Now the Sortino ratio (negative volatility-adjusted excess total returns) are not only 62% better than a 60/40 but 80% better than the S&P 500.
- since 2011 ZIG’s Sortino was also better than both the S&P and 60/40
Except that thanks to falling 1/3 as much as the Nasdaq, over the last 15 years, ZIG’s negative volatility-adjusted returns are 32% better than the Nasdaq.
- 33% lower annual volatility than the S&P
- superior returns
- and better negative-volatility adjusted returns than even the Nasdaq during one of the hottest tech runs in US history
Over the last 15 years, my uncle’s squandered $1 million would have become almost $3 million adjusted for inflation.
- $1.2 million more than a 60/40
ZIG’s average rolling return, for a 67/33 portfolio, has almost matched the S&P 500…for 15 years.
- 33% higher than a 60/40
How many bear markets has the S&P experienced since Dec 2007?
Five. How many has ZIG suffered? ZERO.
It’s down less than 14% in this bear market.
- Nasdaq is down 29%
- S&P 20%
- 60/40 17%
But wait, it gets better.
Stress Testing The Future
Historical backtesting is great but we need to know what kind of returns and volatility are likely in the future.
- in the last 15 years, we’ve suffered two of the worst economic catastrophes since the Great Depression
- three major bear markets (and two minor ones)
- including the second worst market crash in US history
- inflation ranging from -2.5% to 9.1%
- interest rates ranging from 0.3% to 4.0%
In other words, the last 15 years were so extreme, that it creates a good statistical data source for stress testing for the next 75 years.
- barring recessions and bear markets worse than the Great Recession or Pandemic this analysis is likely to be highly accurate
Here I’m stress testing every ETF with a 10+ year track record.
- 90% statistical significance with that time frame
75-Year Monte Carlo Simulation: Stress Testing Your Optimized Portfolio
- 5,000 simulations
- post-tax earnings (highest tax bracket) for conservatism including 10% state income tax (most people don’t actually have this)
- 4.6% withdrawals- (though can test various withdrawal rates) the FactSet safe consensus
- you can also stress test what happens if we get a lost decade at the start of the 75-year period
- starting value $1 million (what my uncle is investing into his ZIG portfolio)
Even factoring in the highest tax bracket, state taxes, the ACA surcharge, the 50th percentile base case for my uncle’s ZIG portfolio is 8.8% returns, or 6.6% after inflation.
What does this mean? That these portfolios offers an 80% statistical probability of:
- 5.4% to 7.8% CAGR post-tax inflation-adjusted returns
- 13% to 22% peak declines in future bear markets (not including the annual withdrawals)
- 21% to 37% peak declines (including annual withdrawals)
- 4.8% to 8.7% safe withdrawal rate (4.6% is the FactSet consensus for a low rate world in the future)
Now compare it to a 60/40 using historical data going back to 1992.
VBINX (60/40) 75-Year Monte Carlo Stress Test
- note that the blue-chip economist and the bond market consensus is that long-term interest rates will average 2% to 3% over time
- since 1992 steadily falling interest rates were a major tailwind for bonds (stocks too, to a lesser extent)
- the FactSet consensus is that a 60/40 will deliver 6.8% long-term returns and 4.3% after inflation in the future
A 60/40 offers an 80% statistical probability of:
- 3.3% to 5.5% CAGR post-tax inflation-adjusted returns
- 13% to 22% peak declines in future bear markets (not including the annual withdrawals)
- 23% to 34% peak declines (including annual withdrawals)
- 3.3% to 6.1% safe withdrawal rate (2.3% is the FactSet consensus for a lower rate world)
ZIG Vs 60/40: 75-Year Monte Carlo Simulation Summary
|Metric||60/40||ZEUS Income Growth Portfolio||ZIG Vs 60/40||Winner 60/40||
Winner ZEUS Income Growth
|Worst-Case Annual Post-Tax Return (Highest Tax Bracket)||5.79%||7.56%||1.77%||1|
|Best-Case Annual Post-Tax Return||7.98%||10.05%||2.07%||1|
|Base-Case Annual Post Tax Return||6.90%||8.79%||1.89%||1|
|Worst-Case Inflation-Adjusted Annual Post-Tax Return (Highest Tax Bracket)||3.31%||5.39%||2.08%||1|
|Best-Case Inflation-Adjusted Annual Post-Tax Return (Highest Tax Bracket)||5.50%||7.84%||2.34%||1|
|Base-Case Inflation-Adjusted Annual Post-Tax Return (Highest Tax Bracket)||4.43%||6.62%||2.19%||1|
|Worst Case Final Portfolio Value (Factoring In Annual Withdrawals)||$1,989,114||$6,900,908||$4,911,794||1|
|Best Case Final Portfolio Value (Factoring In Annual Withdrawals)||$9,252,633||$38,511,933||$29,259,300||1|
|Base Case Final Portfolio Value (Factoring In Annual Withdrawals)||$4,347,406||$16,208,333||$11,860,927||1|
|Worst Case Inflation-Adjusted Final Portfolio Value (Factoring In Annual Withdrawals)||$337,687||$1,507,786||$1,170,099||1|
|Best Case Inflation-Adjusted Final Portfolio Value (Factoring In Annual Withdrawals)||$1,628,400||$8,436,413||$6,808,013||1|
|Base Case Inflation-Adjusted Final Portfolio Value (Factoring In Annual Withdrawals)||$754,063||$3,586,239||$2,832,176||1|
|Maximum Decline- Worst Case||12.57%||12.67%||0.10%||1|
|Maximum Decline- Best Case||21.61%||21.75%||0.14%||1|
|Maximum Decline- Base Case||16.16%||16.17%||0.01%||1|
|Safe Withdrawal Rate – Worst Case||3.21%||5.12%||1.91%||1|
|Safe Withdrawal Rate- Best Case||5.22%||7.27%||2.05%||1|
|Safe Withdrawal Rate – Base Case||4.24%||6.21%||1.97%||1|
(Source: Portfolio Visualizer Premium)
The 60/40 is expected to be slightly less volatile over time.
- it has 7% more bond exposure
But notice how ZEUS, despite 7% less bond exposure has a very similar peak decline profile of the 60/40, but MUCH higher long-term likely returns.
- $3,586,239 in base case end inflation-adjusted value
- $2,832,176 more than a 60/40
And remember this is AFTER pulling out 4.6% of the portfolio each year.
What are the probabilities of losses over the next 75 years?
There’s a 0.18% probability that my uncle’s ZIG portfolio experiences a 20% bear market in the next 75 years.
And a zero probability of a 27.5+% decline. Even if we get another 50+% market crash.
The probability of losing money over 75 years? Statistically zero.
What about the probability of not achieving sufficient returns to meet my uncle’s long-term goals (5% annual returns)?
The probability of 5+% returns over the next 50 years is 99.88%.
- as close of a guarantee of success as you can get in life
The probability of 7.5% long-term returns over 50 years is 85.6%.
- good enough to let almost any investor retire in comfort and possibly safety and splendor
Is this the perfect portfolio? No, but it’s close to the perfect portfolio for my uncle’s goals, time horizon, and risk profile.
Portfolio Optimization: Making Sure Your Portfolio Is Reasonable And Prudent
You can optimize a portfolio using statistical data to get an idea of whether or not your asset allocation is reasonable and prudent for your needs.
Consider this optimization:
- minimize volatility with 10% long-term returns
- vs 9.86% to 15.34% historical annual return range
Note how the asset allocation is a lot different than what my uncle is actually using.
You can optimize for many variables, such as the volatility-adjusted returns or Sharpe ratio.
But does being perfect matter? Not really.
Your Portfolio Doesn’t Need To Be Perfect Just Right For Your Needs
- beats the 60/40? By about 3.1% per year
- low volatility? 10.7% vs 60/40’s 10.1%
- peak decline (intraday): 20.6% vs 31.24% 60/40
- Sortino ratio: 1.39 vs 0.92 60/40
Notice how the Sortino for my uncle’s ZIG portfolio is almost identical to the volatility maximized portfolio and similar to the one with the highest volatility adjusted return.
- and 51% better than a 60/40
OK, so now we’ve seen why my uncle chose these six dividend blue-chip assets to save his retirement.
We’ve stress tested them against historical returns. But now let’s crank up the safety to the max with the ultimate stress test.
75-Year Monte Carlo Simulation: Great Depression 2.0 Worst-Case Scenario
This isn’t just a stress test, it’s a doomsday scenario tester for any portfolio.
- not just a lost decade for stocks
- literally the worst years of returns over 75 years…packed together, back to back, in the first 10 years
This is equivalent to another Great Depression. Why?
Because it’s the equivalent of five recessionary bear markets… back to back… all at once.
A 10-year Great Financial Crisis and a worse economy than the Great Depression… the worst economy in US history… by far.
- Goldman Sachs puts the probability of this scenario (most likely triggered by nuclear war with Russia) at approximately 2.5%
We use the 10th percentile simulation results to define our worst-case Great Depression scenario.
- not just a Great Depression but the worst-case Great Depression Scenario
- 0.25% probability event
- one in 400 worst-case scenario
S&P 500 Great Depression 2.0 Worst-Case Scenario
Nasdaq Great Depression 2.0 Worst-Case Scenario
In the worst-case scenario, of another Great Depression, there is a 10% chance that the S&P 500 falls as much as 81%.
The Nasdaq could crash as much as 97%.
60/40 Great Depression 2.0 Worst-Case Scenario
A 60/40, worst-case, during another Great Depression, has a 10% probability of falling 53%.
- compared to an 81% decline in the S&P 500
- and 97% decline in the Nasdaq
How about ZEUS Income Growth?
- 48% worst-case peak decline vs 53% 60/40
- still $1.5 million worst-case inflation-adjusted end value vs $350K 60/40
- 2.1% minimum safe withdrawal rate vs 1.6% 60/40
- zero simulations in which the portfolio hit zero
What are the probabilities of peak declines in this doomsday scenario?
Including the 4.6% withdrawal rate a virtual certainty of a greater than 40% decline, though 0% probability of losing money over the long term.
What about the probability of earning high enough returns to meet my uncle’s needs (5% annual returns)?
The probability of 5% returns over 50 years (my uncle’s time frame including retirement), is 99.38%.
- a 99.38% probability of achieving his financial goals…even in a worst-case, Great Depression scenario
That’s why my uncle is sleeping well at night in this bear market. Worried about recession? Do you think it’s going to lead to a 10-year bear market? The worst economy in US history? The complete collapse of the stock market and global economy?
If not, then my uncle’s ability to retire rich and stay rich in retirement is as close to 100% as is possible in this world.
What’s Actually Likely To Happen
Stress testing a 75-year period is to simulate the realistic bear markets of the future, and stress test against the worst possible economy possible (without the world ending).
But here’s my uncle’s actual retirement plan.
- contribute $20K per month to ZIG for 30 years
- with zero withdrawals and DRIPing the dividends
- then start withdrawing 4.6% for the next 55 years (just in case he lives to 125)
- the age that the medical consensus believes is the longest humans can live without star trek technology of the future
What are these six blue-chip dividend assets likely to accomplish for my uncle?
What My Uncle’s ZIG Portfolio Is Likely To Look Like In 30 Years
Thanks to heavy DCA my uncle’s likely peak declines are likely to be 10% in the typical bear market over the next 30 years.
- worst-case bear market decline -15%
- not counting DCA (new money) 18% worst-case decline (not even a bear market for the portfolio)
The probability of a 20%-plus bear market in the next 30 years? Statistically 0.1%.
- 1 in 1,000 chance that my uncle experiences a bear market in the next three decades
The probability of earning at least 5%-plus returns? 99.12%.
The probability of earning at least 7.5%? 75.16%.
The probability of earning at least 6.6% annual returns? 90%.
- 90% probability of earning 6.8X his money
- 3.4X adjusted for inflation
What about income?
Dividend Income To Help My Uncle Retire In Safety And Splendor
My uncle is 90% likely to end up with a minimum of $18.2 million, adjusted for inflation, by retirement. The base case scenario is $27.1 million with a best case of $41.4 million.
- not counting his 401K and Roth IRA which he maxes out each year
What does that mean in terms of income?
Using the base-case estimate of inflation-adjusted portfolio value after 30 years we can find out.
What My Uncle’s Retirement Is Likely To Look Like
What happens when my uncle turns 70 and stops adding to his ZIG portfolio and instead starts withdrawing 4.6% per year (0.383% per month)?
- Nick Maggiulli’s research shows that withdrawing money as slowly as possible maximizes the long-term effects of compounding.
80% probability that, if my uncle does live to 125 (best case scenario) he will die with between $33 million and $149 million, adjusted for inflation.
After 30 years of retirement (age 100), he’s most likely to have $45.2 million with at least $26 million and possibly as much as $78 million, adjusted for inflation.
- most likely future peak portfolio declines: -15%
- worst-case portfolio decline: -21% (-34% including withdrawals)
In fact, here is the probability of future declines for my uncle once he’s in retirement.
Probability of a 20+% bear market? 0.28%.
Probability of a 27.5+% decline? Statistically zero.
Probability of losing all his money? Statistically zero.
And here are the likely returns.
And here’s the probability of achieving his financial goals.
The probability of success (5% annual returns)?
- in the first 30 years of retirement: 99.34%
- in the first 50 years (age 120): 99.94%
And what about income?
How My Uncle Plans To Donate $100 Million To Charity
My uncle doesn’t live lavishly but wants to be a philanthropist.
- he donates 5% of his income to GiveDirectly
- and plans to donate 50% of his retirement income
- and donate 50% of his fortune to them when he dies
In year one of retirement, my uncle is 90% likely to be able to withdraw $1.2 million to $1.3 million, adjusted for inflation.
- base-case $1.25 million
- more than he lost in crypto due to terrible risk management
What about year 30?
- between $1.2 million and $3.6 million (in today’s money)
- base-case: $2.1 million
If my uncle lives to 125?
- between $1.5 million and $6.8 million (in today’s money)
- base-case: $3.25 million
What about cumulative retirement income?
Retirement Income (Inflation and Tax-Adjusted)
|Annualized Income Growth Rate||1.68% (S&P 500 consensus: 1.7% CAGR)|
(Source: Portfolio Visualizer Premium)
- after 30 years: $49,385,159 in today’s dollars
- after 40 years: $72,272,012 in today’s dollars
- after 50 years: $99,698,841 in today’s dollars
- after 55 years: $115,278,268 in today’s dollars
- annualized income growth (inflation and tax adjusted): 1.68%
My uncle’s retirement plan includes not just recouping his $1 million crypto loss, but living richly, and donating over $100 million to his favorite charity.
This isn’t just a good retirement, it’s truly retiring in safety and splendor.
And it’s 100% possible thanks to a focus on safety and quality first, prudent valuation and sound risk-management always, and these six dividend blue chips.
Bottom Line: The Right ETFs And Blue Chips Can Help You Recover From Mistakes And Retire In Safety And Splendor
Even the smartest people can make the dumbest financial mistakes.
- Isaac Newton and my uncle are just extreme examples
Most of us have never lost $1 million, and my goal is to help you practice disciplined financial science so that you never do.
Most of us are also not as lucky as my uncle, to be blessed with a high-paying job at a tech giant that allows us to buy $250,000 per year worth of stocks.
But the principles of saving your retirement from even costly mistakes, so you can rise like a Phoenix from the ashes and retire in safety and splendor apply to almost anyone.
My best friend lost 80% of his 401K to speculative tech… now he’s 99% likely to retire thanks to a ZEUS portfolio I helped guide him in designing.
- using QQQM, VYM, and VGLT as its core
My father invested 65% of his 401K into BABA (vs a 2.5% OR LESS risk cap recommendation) and lost half of his retirement nest egg.
I helped guide him through a disciplined risk management process to craft an Ultra SWAN growth portfolio that is 90% likely to let him retire in comfort in just 10 years (age 70).
My uncle’s $1 million loss, half his life savings, in a matter of weeks, is just an extreme example of how terrible risk management and speculative assets, can lead to retirement dream-crushing results.
I personally have lost about $650K due to poor life choices (most of it from my divorce and losing the house), but I’ve lost money speculating as well. In fact, over my 23 years of investing, I’ve tried every get-rich-quick scheme you can think of:
- day trading
- speculative options
And do you know what losing a small fortune taught me? The truth of these words.
In order to win the game, first you must not lose it.” – Chuck Noll
There are two times in a man’s life when he should not speculate: when he can’t afford it and when he can.” – Mark Twain
We’ve all made mistakes we regret. We’ve all lost money in bad investments. And if you invest long enough you will eventually suffer losses.
That’s because the stock market runs on probabilities, not certainties. Many people consider Wall Street a casino. And guess what? They’re 100% right.
- in the short term anything can happen (stocks can trade disconnected from fundamentals, 3% of 12-month returns are explained by fundamentals)
- in the long term, the house always wins (97% of 30+ year stock returns are explained by fundamentals)
The stock market isn’t a casino rigged against individual investors, it’s rigged against short-term speculators.
And it’s rigged in favor of the smart long-term investor who focuses on safety and quality first, and prudent valuation, and sound risk management always.
There are just two guarantees in the history of Wall Street.
- diversification is the only “Free lunch”
- stocks always go up over time
Blue-chip index funds, whether for the S&P 500, Nasdaq, SCHD, VYM, or dozens of other wonderful choices, are truly “risk-free” assets.
- IF AND ONLY IF you avoid becoming a forced seller for emotional or financial reasons during inevitable market downturns
The only way stocks fail to make money over time and beat inflation, is if the world ends, in which case we’re too dead to care that we were wrong.
Not even the Great Depression and its 87% market crash, and 20% inflation after WWII were able to stop the market from delivering positive real returns in the worst 20-year period in US market history.
And as I showed in this article, even in a one in 400 worst-case scenario, a 10-year Great Recession, with an economy worse than the Great Depression, the S&P is 90% likely to never fall more than 81%.
And even if we experience such a decade-long cataclysm guess how many ETFs can’t support a 4% withdrawal rate?
- none that I’ve seen
- and I’ve stress-tested over 30 of them, in every sector, and every investment strategy
- zero failures across 1.5+ million simulations
Today we face a potential mild recession in 2023. Stocks might fall 10% to 35% more, but guess what?
Fortunes are made in bear markets.” – Todd Sullivan
This might not feel like it, but it’s the best time to be buying world-class dividend paying blue-chips like:
These aren’t the perfect dividend blue-chips for everyone, no stock is.
If you personally don’t like pipelines or tobacco, you can replace the individual high-yield blue-chips with any number of great Ultra SWANs.
- NVS is a great low volatility high-yield healthcare aristocrat
- rating agencies consider ALIZY to be the best run and safest insurance company in the world
- all six of Canada’s largest banks (TD, RY, BNS, BMO, CM, and NTIOF) are Super SWAN or Ultra SWAN quality, A-rated (TD and RY are AA-rated) high-yield safety dividend legends
Everyone’s investment goals are different, as are our risk profiles and time horizons.
The ideal retirement portfolio for you probably looks different than my uncle’s ZIG portfolio.
You might not need to have 33% in cash and bonds.
- the historically optimal recession-resistant portfolio
In that case, feel free to own 100% stocks and ETFs. The key to recovering from costly financial mistakes, and still retiring in safety and splendor is to not lose hope and learn from our mistakes.
That’s what Newton did after losing millions in the South Sea Bubble.
That’s what my uncle did after his misadventures in crypto.
That’s what my best friend did, after nuking his 401K.
That’s what my father did, after buying a crazy large and very dangerous position in BABA.
And that’s what I’ve done after losing my own small fortune to speculative mistakes and a very costly divorce.
Life is not about how many times you fall down. It’s about how many times you get back up.”- Jaime Escalante
Bear markets can be terrifying, especially if you are using the wrong asset mix for your risk profile.
But if you learn from your mistakes, and learn to focus on safety and quality first, and prudent valuation and sound risk management always, you can:
- take charge of your financial destiny
- make your own luck on Wall Street
- build your personally optimized ultra-sleep well at night bunker retirement portfolio
- that’s 99+% likely to let you achieve your retirement goals
- in all economic and market conditions
- and possible retire in safety and splendor
My goal isn’t to help you score quick gains. My goal is to help teach you the principles of sound long-term investing, the same ones that have made the best investors in history, billionaires, and legends.
Whether you have $100 to invest, or $100 billion, the time-tested and fact-based approach I teach and live myself (after learning from my own mistakes) is the best chance you have to retire rich, and stay rich in retirement.
No matter what happens with inflation, interest rates, the economy or the stock market in the years or decades to come.