Cockroach portfolio: Make your investments all-weather amid rising uncertainty

At a time when the market outlook is uncertain and the foreseeable risks are just piling up, a Cockroach portfolio seems to be a good way to ride the market volatility.  

Making prediction is never easy, making one in a volatile market based on ever-changing incoming data is an uphill task.

The word Cockroach, says market expert Anand Tandon, is a bit repulsive. But Cockroach is the only creature that can last a nuclear attack, he said. Forming a portfolio that does not take a call on where the market goes but is able to survive high degrees of volatility is what makes a Cockroach portfolio, also known as all-weather portfolio.

In an interview to Business Today TV, Tandon cited periods such as 1970s, when there was oil shock on the one hand and very high interest rate scenario on the other hand. The high inflation led the US Federal Reserve to allow very high interest rates and even as the US economy was moving downhill.

Tandon said most of the time when an investor does an asset allocation, it is done at 60:40 ratio, which is 60 per cent equity holdings and 40 per cent debt investments. This, he said, is based on assumption that the market would do well and inflation would be under control.

"This is because when the inflation is higher, interest rates are high and bonds do well and when interest rates are low, you know, growth and low inflation is a great place for stocks," Tandon said.

Tandon, however, noted that the the 60:40 ratio does not consider a scenario of stagflation or no growth. For that, one can  look at a portfolio of investing equally into stocks, bonds, cash and commodities.

"An asset allocator called Mr Brown actually came up with this idea and he basically suggested that you should have an equal weighted portfolio which takes into four quadrants stocks, bonds, cash and commodities and that essentially in a very cool sense is what a cockroach portfolio. With this, you should be able to have a portfolio, which is reasonably stable," Tandon said.

Tandon said the idea of having an all-weather portfolio has taken various forms. The commodity not just include not just gold but almost any other commodities.

"Remember the key assumtion for making such a portfolio is that you are not trying to making determine the market direction. If you are in a position to do so, it is not the best option," Tandon said.

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