Why I Stopped Buying Stocks

What's up, guys? It's Gram you here. So, I think it's no surprise that if you're investing in today's market, you have one main objective: to make as much money as possible so that you could flun it on Wall Street Bets. But there's one problem: the more money you try to make, the more likely you are to wind up with nothing.

That's why you'll either see people making reckless YOLO calls with the latest $20 they stole from their mom's purse, or they invest in a mature mix of sophisticated S&P 500 index funds, and they grow their wealth over decades while being outpaced by another guy who makes 100 times that in a single day with a random meme coin.

Although in my never-ending pursuit to find the ultimate investment strategy, I came across something that I have never heard of before that promises the best of both worlds with high returns and low risk. And without further ado, I bring you what is called the cockroach portfolio. Even though this sounds like something you would contact your local pest control office for, the name is a reference from a cockroach's ability to survive whatever happens to it, and this portfolio is no exception.

High inflation? Not a problem. Recession? Everything is fine. The stock market drops? You're making profits!

So, in typical fashion, I decided to spend the entire weekend researching whether or not this actually works, how you could make a cockroach portfolio that's practically indestructible with little to no work, and then how much money you could realistically make from what I think is possibly the most interesting portfolio I have ever seen in my entire life.

Although before we start, as a reminder, I've been donating some of the past ad revenue towards Team Seas, which helps clean up one pound of trash in the ocean. So as a fun way to get along with me, I will donate 10 cents towards their cause for every single like this video gets in the first 5 days.

All right, so when it comes to investing in anything, the general goal is pretty much all the same: step one, make money; step two, don't lose money. But unfortunately, step two presents one issue. Despite what the S&P 500 might want you to believe, the market doesn't just always go up.

Because of that, analysts talk about diversifying your portfolio across different asset classes like stocks, real estate, cryptocurrency, bonds, cash, Pokémon cards, and a variety of other options. That way, if one goes down, the other should more than make up for it. But regardless of that, mfun.com shows us that even the most diversified portfolio saw a best-case drop of 20% during the 2008 Great Financial Crisis, and that's what's led them, and me, to finding out about a theory discovered in the 1970s that would outlast anything you throw at it.

And so, the cockroach portfolio is born.

Now, initially, this is properly referred to as the permanent portfolio because it was meant to permanently last throughout your entire life, no matter what happens in the market. It says that's composed of four main investments: 25% stocks, which do well in growth; 25% bonds that do well through deflation; 25% cash or treasury bills, which do well in a recession; and 25% gold, which does well with inflation.

The creator, Harry Browne, said that this portfolio would do well under any condition because no matter what happens, you would be making money while minimizing the chance of losing anything. The objective here doesn't seem so much to be to try to beat the market but instead to maximize your returns without all the crazy volatility.

As you can see, it's been a fairly steady uptrend with hardly any drops along the way. However, there was one hidden problem. Even though holding on to 50% cash and gold worked throughout the 1970s, with crazy high runaway inflation, in the last 40 years, they've both underperformed by a lot. Cash, for example, is worth 85% less today than it was in 1970, meaning had you just saved $1 over the last 41 years, it would now be the equivalent to 15 cents today, which is really, really bad.

On top of that, recent information found that gold is not an accurate hedge against inflation, except extreme inflation and hyperinflation, where any stable asset is a hedge. So even though the permanent portfolio worked throughout select dates, it failed the long-term test to being truly impenetrable from disaster.

So now, that is where the cockroach part comes in. Instead of diversifying within four brackets, they argue that you have to diversify the diversification, kind of like the inception of inception. They say from 1990 through 2020, it outperformed both stock and 60/40 approaches on both absolute and risk-adjusted bases, with high returns, lower drawdown, and less portfolio volatility — which is a complicated way of saying it makes more money.

As they show us, while the stock market increased 2335%, the cockroach portfolio increased over 8,700%, with a worst-case drop of only 15% along the way. Not to mention, in almost every single 5-year rolling period, the cockroach portfolio generated higher returns than almost any other combination of investments.

And even more interesting is that the cockroach portfolio also includes an equal allocation to Bitcoin, which I have a feeling has helped increase these returns by a monumental amount.

Although in terms of what I think about this, coming from the perspective of someone who makes YouTube videos in front of a 2005 Ford GT, here's my take: why it's done so well and why it might not be a good idea to follow it.

First of all, all of this comes down to what's known as a risk-adjusted return. As a really simple way of putting it, imagine these two scenarios: one, you have a 50% chance at doubling your money or, two, you have a 25% chance at quadrupling your money. So, which one is the better option?

In this case, neither is necessarily better. In fact, they're both the exact same; it just depends on how much risk you want to take for a larger reward. This sort of analysis is done throughout the entirety of investing. This also ties back to what's called the efficient market hypothesis, which theorizes that all investments trade for their fair market value, making it impossible to beat the market in the long term without making riskier investments.

And if there isn't an efficiency or a loophole that makes more money than something else, once enough people know about it, it's not going to work anymore. Because of that, the cockroach portfolio doesn't try to give you higher returns based on some new breakthrough investment strategy, but instead, it tries to give you the highest risk-adjusted return considering what you're investing your money into.

So given all of that and a whole bunch of information you definitely didn't ask for, why is it then that the cockroach portfolio got such a high return throughout the last 30 years? And is it possible that that might continue for another 30 years?

Well, a significant portion of those returns were due to a very strong stock and real estate market, a gold surge through 2010, stock market puts during the 2008 Great Financial Crisis, and Bitcoin, which performed when gold didn't.

Although despite the enormous success of the cockroach portfolio, my biggest concern is this: backed assets to do it for you, which may or may not pan out as you expect. So for myself, I've taken a much more simplistic approach, and I have a feeling for most people, you would be able to do something similar to this with a lot less work.

In terms of what I do, I want to make sure that I never have more than 50% of my net worth in one asset class, and I do my best to spread myself through as many different places as possible. Now, it certainly didn't start this way, and really, up until about 2 years ago, I was almost 100% entirely in real estate.

But I started to invest elsewhere, and I'm really glad I did. As it is now, I hold about 5% of my portfolio in residential rental real estate, spread throughout seven properties in Southern California, and one property in Las Vegas. These are meant to be long-term holds that I'm never going to sell, that I rent out in high-demand areas that will hopefully increase in value.

However, throughout the last two years, I've decided to hold off from buying any more rental properties and instead diversify 30% into the stock market as a way to invest without tying myself down to a specific property or location.

Of that 30%, about half of that is invested throughout boring index funds covering the S&P 500, the total stock market, and international funds, while the other half is composed of over 50 individual stocks that I bought post-2020 Covid that just happened to go up a lot in value.

From here on out, though, pretty much 100% of my investments just go into the S&P 500, so there's not a lot to report. My next biggest position is about 15% held in cash throughout high-yield savings accounts and ARUA. This is way too much to be holding on to, and I would have been way better off just dumping it all into the market, but I have a lot of taxes to pay, and I keep some money sitting on the sidelines for any opportunities that might come up.

So 15% just gives me the peace of mind that whatever happens, I have cash available to throw whatever I need to. After that, I've got about 10% invested in various non-startup companies. To me, this is something that's either going to be a total break-even or it's going to make a ton of money, and I have no idea what's going to happen until about 10 years from now.

So I just kind of pretend at this point that it doesn't even exist, and whatever happens, happens. Then from there, I have another 5% invested in cryptocurrencies, mainly between a 60/40 split to Bitcoin and Ethereum. This is something that I'm slowly looking to increase over time, and by mid-2022, I would love for this to be anywhere from 8 to 10%.

But I'm also taking this one very slowly because I want to keep it at the point where if it drops, I don't have to stress about it. Finally, I have another 5% invested in my other category, and this includes alternative investments like the Ford GT, watches, collectibles, and anything else that might go up in value, but I'm not counting on it.

These usually have their own collector market, and admittedly, these are the fun investments that I get to make because I get to enjoy them on a daily basis without losing any money.

Although in terms of what you could do without having to buy multiple rental properties, collectibles, and post-Covid stocks, here's my take and a good way to replicate all of these strategies on a budget.

So far, from the stock market's perspective, historically, the highest risk-adjusted return seems to be coming from the S&P 500, meaning if you're young, you plan to hold for at least 20 years, and you don't mind the roller coaster ride along the way, if history is any indication, throwing it all in an S&P 500 index fund is probably the best way to go.

On the other hand, if you want very similar returns with even more diversification, then a total stock market index fund that covers everything would give you an even broader investment with even less volatility. If you want slightly more coverage than the "what if" scenario, since so far, all of this only covers the US market, you can also allocate 15% to an international stock market index fund, which covers everything outside the US.

If we go even further in terms of maxing returns, there have been multiple articles that state that a 2 to 5% allocation to Bitcoin would wind up increasing your profit substantially while helping you diversify across a new asset class.

Of course, since every investment has the potential to drop in value, there should be a safety net that you always have on the sidelines that's uninvested. For most people, a 3 to 6-month emergency fund in a high-yield savings account should be more than enough. That's because statistically, 66% of the time, you're better off just dumping all of your money in the markets as soon as you have it than waiting on the sidelines for an opportunity to jump in.

Of course, when I say that, I know what you're probably thinking, but that means I'm a hypocrite holding 15% cash waiting for a good opportunity. And to a certain degree, that's true, but it's also important to remember that my tax bills are enormous, and for someone in my situation, holding on to too much cash is worth the risk compared to the opportunities I could take advantage of if something comes up, like a private equity deal, real estate, or anything else that might come my way.

So all of this is to say the best way to beat the market is not to beat the market but instead find the best risk-adjusted returns that you can, which usually comes from diversifying as much as possible.

I'm not saying you gotta go 100% in the cockroach method, even though throughout the last 30 years, it's done exceptionally well. But that is to say that you should never invest too much in one place, and in most cases, spreading out your investment as much as possible ends up making you more money than making one single investment that will either make you a trillion or broke.

So with that said, you guys, thank you so much for watching. And as a quick reminder, every one like this video gets is another 10 cents I will donate to Team Seas, which helps clean up trash in the oceans. So if you want to be a part of it, just hit the like button.

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Thank you guys so much for watching, and until next time!