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How not to lose money

It's been easy to run a balanced portfolio in recent years. This might not remain the case
How not to lose money

“Rule number one: never lose money. Rule number two: never forget rule number one.” Sadly, however, none of us can strictly follow Warren Buffett’s advice simply because we cannot foretell the future. What we can do, however, is greatly mitigate losses without sacrificing overall long-term returns – and we don’t need to pay expensive fund managers to do so.

My first table shows the performance of a very simple portfolio – one with 50 per cent invested in MSCI’s world index, 20 per cent in gilts and 10 per cent each in gold, sterling cash and US dollar cash; I chose these proportions as reasonable round numbers rather than because they would have optimised our portfolio. Such a portfolio would have returned only slightly less than global equities since 1990, but with much lower volatility. It has had a much higher Sharpe ratio than the MSCI, and a lower worst-case annual loss.

We can improve on this, though. My second column shows what happens if we add the Halloween rule. This keeps the same portfolio between November and April, but ditches equities on 30 April in favour of a portfolio split equally between gold, gilts, UK and US dollar cash. This would have given us higher returns than equities at much less risk.

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