Content Library

SUV Analogy - Audio Clip

A vehicle for various market environments.

Transcript

Eric Crittenden: You either bought a sports car, a luxury sedan, a motorcycle, or a four-wheel drive or something like that. Specialized vehicles that were great. You know, a Corvette is great on an open highway at 5:00 in the morning with no traffic. A four-by-four is great if you have to cross a stream or go on a rough off-road fishing trip. The dreaded station wagon was great if you had six kids and all their soccer equipment.

At some point, some really smart person figured out that an SUV could serve 90% of all those purposes. It could be luxurious enough for a night out on the town. It could be durable enough to go off-road to some degree. It can even be pretty sporty. Not quite a Corvette, but sporty enough to make it worthwhile for you. I look at that as an all-terrain vehicle. Drive it on the freeway, night out on the town, drive it off-road an all-weather portfolio is basically the SUV of portfolios.

Optimally, you'd want your all-weather portfolio to work almost equally as well in all market environments. Inflation shouldn't be a terrible problem for an all-weather portfolio. Deflation shouldn't be a terrible problem. Runaway growth shouldn't be a terrible problem. An all-weather portfolio should be designed to work reasonably well in all market environments. Now, you don't get something for nothing. It's not alchemy.

It will underperform whatever is most closely calibrated to that market environment. That SUV is not going to keep up with the Corvette, and it's not going to be as effective as the four-wheel drive pickup truck off-road, but it's good enough to do reasonably well in all market environments, and that's really important to investors because it solves two problems.

One is it allows people to stay invested and not make emotional decisions when they have the wrong asset for the current market environment. Two, the way compounding works is it actually rewards this kind of splitting the middle behavior. Because by having an all-weather portfolio that has uncorrelated assets in there, working together as a team mitigates the volatility and the risk in the portfolio, but it doesn't necessarily dilute the returns between the different asset classes. You can maintain your compounded return over a long period of time but really reduce the risk.

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