The cockroach portfolio

What it is and how it can help you invest during the current uncertainty

- ANAND TANDON

Cockroaches are disgusting creatures.

But they do have one underappreciated ability - they have survived over 350 million years. While dinosaurs and millions of other species have become extinct, roaches have developed an ability to survive without air (for over 40 mins), submerged in water (over half hour) or through a radiation exposure 15 times more than what would kill humans. It is said that cockroaches may be the only living things that can survive a nuclear blast.

What has that got to do with investing? Well, the purpose of investing is to grow capital in a risk-adjusted manner- with a portfolio capable of surviving the highest volatility and yet providing returns that are positive after adjusting for inflation. Enter the cockroach portfolio - also called as an 'all-weather portfolio' or even a permanent portfolio' since it needs no monitoring across economic cycles.

First written about in the 1980s by Harry Browne, a financial advisor, it has been used by a variety of fund managers as a passive-investing tool. In recent times, Ray Dalio, investment chief of Bridgewater Associates, one of the largest hedge funds in the world, has popularised his own version. So, let's look at the fundamental underpinnings of the portfolio construct.

The cockroach vs the 60:40 portfolio 

Most models of portfolio construction are based on asset allocation and the most popular assets revolve around equity and debt. Even large institutions gravitate towards a 60 per cent equity and 40 per cent debt portfolio as an optimum risk-adjusted portfolio. One of the key insights that Browne had was that two factors essentially drive asset-price performance inflation and growth. Market performance can then be mapped into four quadrants