A diversified investment strategy that prioritizes stability over high-risk gains is experiencing remarkable success, achieving a 26% return this year, a performance not seen since 1933. This four-way portfolio allocation—equally divided among stocks, bonds, cash, and commodities—has garnered attention, particularly from Bank of America’s Michael Hartnett.
This portfolio construction is noteworthy for its intention to avoid the frenzied pursuit of market trends. Instead of concentrating investments in a single high-performing area, it strategically balances growth, defensive assets, liquidity, and tangible resources. Each component of the portfolio has played a significant role this year, leading to extraordinary overall performance.
Hartnett’s analysis highlights an important shift in asset allocation strategies, suggesting that the current market environment is rewarding those willing to diversify their investments. The traditional 60/40 portfolio, which allocates 60% to stocks and 40% to bonds, has seen a stark contrast in performance compared to the balanced 25/25/25/25 approach, marking its third-best outperformance in a century.
One key element contributing to this year’s success is the role of commodities. While stocks and bonds have performed well and liquidity remains advantageous, commodities have emerged as the standout asset, providing a unique advantage that standard mixes have lacked. This dynamic has led Hartnett to advocate for the inclusivity of commodities in investment strategies.
Earlier in the year, Hartnett characterized the 25/25/25/25 portfolio as a “sleep like a baby” investment strategy, suggesting that the 2020s may favor broader diversification compared to traditional allocations. He noted that many investors may still underexpose themselves to the crucial commodities component, which is driving the differences in performance between this diversified portfolio and the classic investment approach.
The concept of this four-way portfolio has its roots in the Permanent Portfolio strategy developed by Harry Browne, which focused on equal investments in stocks, long-term Treasury bonds, cash, and gold. However, Bank of America’s model incorporates a broader selection of commodities.
For investors interested in mirroring this diversified allocation, several Exchange-Traded Funds (ETFs) can provide exposure to each category. Potential options for stocks include VOO, IVV, and SPY for broad U.S. stock exposure; IEF, GOVT, and TLT for long-term Treasury and bond exposure; SGOV, BIL, and SHV for short-term Treasury and cash-like investments; and PDBC, BCI, and DBC for broader commodities exposure. These ETFs serve as examples, though they do not reflect the exact methodology used by BofA in their analysis.
With strong performance fueling interest in commodities and diversified investments, the seemingly unremarkable portfolio that has achieved historical returns may have even more potential for growth in this shifting market landscape.
