15 High-Yield, Low Volatility Blue-Chips For The Ultimate Crash-Proof Retirement Portfolio

(Source: imgflip)

The S&P 500 is down 4.3% from its recent record highs, suffering a two-day dip.

Many of the most popular tech stocks, that have been driving most of this rally, are falling at a far faster rate.

Volatility is one of the three kinds of risks investors face, it’s actually the least important, according to Warren Buffett.

Volatility caused by money managers who speculate irrationality with huge sums will offer the true investor more chance to make intelligent investment moves.

He can be hurt by such volatility only if he is forced, by either financial or psychological pressures, to sell at untoward times.” – Warren Buffett (emphasis added)

That’s not to say that low volatility investing isn’t a valid strategy to pursue. In fact, lower volatility is one of the seven proven long-term ways to beat the market.

This market dip is currently threatening to turn into a pullback, and possibly a correction, just as I’ve been warning about for weeks.

S&P Valuation Profile: Market Still Massively Overvalued

Year EPS Consensus YOY Growth Forward PE Blended PE Overvaluation (Forward PE) Overvaluation (Blended PE)
2020 $130.18 -20% 26.3 24.4 60% 44%
2021 $166.39 28% 20.6 23.5 25% 38%
2022 $189.51 14% 18.1 19.3 10% 14%
12-month forward EPS 12 Month Forward PE Historical Overvaluation PEG 20-Year Average PEG S&P 500 Dividend Yield 25-Year Average Dividend Yield
$146.00 23.5 43% 2.76 2.35 1.74% 2.06%

(Sources: Dividend Kings S&P 500 Valuation & Total Return Tool, F.A.S.T Graphs, FactSet Research, Brian Gilmartin, Reuters/Refinitiv/IBES/Lipper Financial, JPMorgan, Ed Yardeni, Multipl.com)

At its recent peak, the S&P 500 was 49% overvalued and 5-year probability-weighted expected returns were just 2.5% CAGR.

S&P Valuation Profile: Still Very Poor Returns Expected

Year Upside Potential By End of That Year Consensus CAGR Return Potential By End of That Year

Probability-Weighted Return (OTC:CAGR)

2020 -34.8% -73.3% -55.0%
2021 -15.8% -12.2% -9.2%
2022 -1.6% -0.7% -0.5%
2025 24.5% 4.2% 3.2%

(Source: Dividend Kings S&P 500 Valuation & Total Return Tool)

After a modest dip, the market’s forward expected return is up to 3.2% over the next five years, about 1/3 its historical norm.

Economist Mohamed El-Erian warned on CNBC that the US stock market can “easily” fall by another 10% if investor attitudes shift in the coming days.

His comments came after the Dow, S&P 500, and Nasdaq Composite suffered their biggest declines in months, driven by a massive sell-off in tech stocks on Thursday.

“We could have another 10% fall, easily…if people start thinking fundamentals,” he said, adding that investors would be forced to consider the actual state of the economy and implication of corporate bankruptcies.

As market fundamentals come into play, “that is the tug of war that’s going to play out, and it’s going to show the DNA of investors,” El-Erian said.” – Business Insider (emphasis added)

If stocks fall another 10% that would be about a 14% peak decline, which is actually the average correction since 1945.

(Source: Guggenheim Partners, Ned Davis Research)

In other words, perfectly normal, healthy and to be expected when stocks were trading at such lofty levels, totally disconnected from fundamentals.

What could act as a catalyst for a 14% correction?

(Source: CNBC)

Remember how record long-term low-interest rates were supposed to justify permanently higher market valuations under the there is no alternative (TINA) market hypothesis?

10-Year Treasury Yield Historical Fair Value Earnings Yield (3.7% Risk Premium) Interest Rate Adjusted Fair Value Forward PE
3.0% 6.7% 14.93
2.6% 6.3% 15.87
2.5% 6.2% 16.13
2.0% 5.7% 17.54
1.5% 5.2% 19.23
1.0% 4.7% 21.28
0.5% 4.2% 23.81
0.3% 4.0% 25.32
0.1% 3.8% 26.32
0.0% 3.7% 27.03
-0.5% 3.2% 31.25
-1.0% 2.7% 37.04
-1.5% 2.2% 45.45
-2.0% 1.7% 58.82
-2.5% 1.2% 83.33
-3.5% 0.2% 500.00
-3.69% 0.01% 10,000.00

Well, guess what? A stronger than expected jobs report caused bond yields to soar on Friday. The 10-year US Treasury yield rose 16% on Friday, a massive move for generally slow-moving bonds.

The blue-chip economist consensus (16 most accurate economists out of 45 tracked by MarketWatch), Moody’s, the Fed, and the Congressional Budget Office expect 10-year yields to average 2.0% to 2.6% once the pandemic is over and the economy begins to recover.

According to UBS and Goldman Sachs that would justify not a 23 or 24 PE on stocks, which we saw recently, but 16 to 17.5, the historical norm over the last 10 to 20 years. That time frame includes both the modern QE, low-rate era, and 90% to 91% of stock returns were a function of fundamentals.

S&P Market-Determined Fair Value In Low Rate Environment is 16.5 to 17.5

(Source: F.A.S.T. Graphs, FactSet Research)

In other words, if rates keep rising due to a stronger than expected economic recovery, stocks could fall purely due to multiples mean reverting to the same historical levels that leading economists and asset managers expect over time.

I just wrote an article explaining, step-by-step, how to find the best reasonably priced low volatility, high-yield blue-chips to prepare for an inevitable though impossible to time market downturn.

Why not just sell all your stocks before the market corrects and buy back at the bottom? Because market timing is almost impossible for most Wall Street pros to pull off consistently, and the track record of regular investors is absolutely abysmal.

Long-term investing success is about managing risk and making high probability decisions.

(Source: imgflip)

Or as Charlie Munger said, it’s about making “consistently not stupid” decisions.

In this video article, I’ll show you precisely how to construct a crash-proof bunker sleep well at night or SWAN retirement portfolio. One that

  • combines the proven income & wealth compounding power of quality low volatility blue-chips
  • with prudent asset allocation and diversification
  • to create a portfolio tailored for your specific risk profile, time horizon, and goals
  • that can withstand anything the pandemic, economy, or stock market can throw at us over the coming years and decades

Building The Ultimate Crash-Proof SWAN Retirement Portfolio

In the last few days valuations on some of the low volatility, high-yield blue-chips I discussed in my previous article have changed, and some are now overvalued, and some new ones are now reasonably priced.

So let’s begin by re-screening the Dividend Kings Master List, now 467 companies (including all dividend aristocrats, kings, and champions) for

  • fair value or better
  • 8/11 above-average quality
  • 4+/5 dividend safety (6% or less dividend cut risk in this pandemic)
  • investment-grade credit ratings 11% or less 30-year bankruptcy risk)
  • 12+ year dividend growth streaks (27% of companies have cut dividends so far and 82% have had streaks shorter than this)

(Source: Justin Law)

Here is a summary of this reasonable and prudent screening process.

  1. starting with 467 companies
  2. 160 are potentially reasonable or good buys (or better)
  3. 134 are 8+/11 above-average quality or better
  4. 125 have 4+/5 above-average dividend safety or better
  5. 121 have investment-grade credit ratings
  6. 42 have 12+ year dividend growth streaks

(Source: Dividend Kings Company Screening Tool) – blue = potentially reasonable buy, green = potentially good buy or better

But this merely gives us the proper candidates for constructing a diversified and prudently risk-managed portfolio.

Step 2: Prudent Risk Management

These are the risk management guidelines that I constructed over time with inputs from colleagues with over 100 years of asset management experience.

I use it to run all DK portfolios and my retirement portfolio as well, where I keep 100% of my life savings.

Let’s use these guidelines to construct a diversified and prudently risk-managed portfolio designed to minimize long-term volatility.

15 High-Yield Low Volatility Blue-Chips To START Building The Ultimate Crash-Proof SWAN Retirement Portfolio

Deep Dive Videos: 2 Low Volatility, High-Yield Blue-Chip Bargains To Consider

Here are deeper looks at three Dividend Kings Phoenix Watchlist companies that are part of the Ultimate SWAN portfolio. Each one represents a potentially good buy or better.

UGI Corp: Dividend Champion Utility Most People Have Never Heard Of

UGI Fundamentals

  • quality score: 9/11 Blue-Chip
  • safety score: 5/5 very safe (2% to 3% dividend cut risk in this recession, 0.5% risk in a normal recession), stable outlook
  • Max portfolio risk cap recommendation: 7% or less
  • yield: 3.9%
  • current price: $34.17
  • Potential good buy price: $37 or better
  • 2020 average historical fair value: $43 ($33 to $61 range, Morningstar quant estimate $38.54, uncertainty “medium”, I agree given the fair value range this year)
  • approximate discount to fair value: 21%
  • DK rating: potentially good buy
  • historical fair value: 16 to 19 PE
  • current blended PE: 13.6
  • Earnings yield (Chuck’s “essence of valuation”): 7.3% vs 6.7% recommended
  • Growth priced into stock: about 2.6% CAGR according to Graham/Dodd fair value formula
  • Growth priced into stock based on historical PEG: 4.6% CAGR
  • long-term growth consensus: 8.0% CAGR (Management guidance 6% to 10%)
  • the margin of error adjusted analyst long-term consensus growth forecast: 5% to 12% CAGR
  • 5-year total return potential: 13% to 21% CAGR (analyst consensus 16.6% CAGR)
  • PEG ratio: 1.69 vs 2.96 historical 2.76 S&P 500 vs 2.35 historical S&P 500
  • Investment Decision Score: 94% = A excellent

UGI Investment Decision Score

I never recommend a company, much less put my own money at risk without first knowing exactly how prudent a potential investment it is relative to the S&P 500, most people’s default alternative.

The investment decision score is based on valuation and the three core principles of all successful long-term investors.

Goal UGI Why Score
Valuation Potentially good buy 21% undervalued 4/4
Preservation Of Capital Average Estimated BBB stable credit rating = 7.5% 30-year bankruptcy risk 5/7
Return Of Capital Exceptional 23.2% of capital returned over the next 5 year via dividends vs 10.3% S&P 500 10/10
Return On Capital Exceptional 12.5% PWR vs 3.2% S&P 500 10/10
Relative Investment Score 94%
Letter Grade A excellent
S&P 73% = C (market-average)

(Source: Dividend Kings Investment Decision Tool)

UGI Corp is one of the most prudent high-yield low volatility investments conservative income investors can make in this dangerous market.

We’ve bought it four times in our Phoenix portfolio and look forward to hopefully buying it several more times should this dip become a pullback or correction.

National Fuel Gas: A Dividend King Utility Retirees Can Trust

NFG Fundamentals

  • quality score: 9/11 Blue-Chip
  • safety score: 5/5 above-average (2% to 3% dividend cut risk in this recession, 0.5% risk in a normal recession), stable outlook
  • Max portfolio risk cap recommendation: 7% or less
  • yield: 4.0%
  • current price: $44.19
  • Potential good buy price: $49 or better
  • 2020 average historical fair value: $58 ($54 to $69 range, Morningstar estimate $44.82, uncertainty “high”, I consider it medium uncertainty given the fair value range this year)
  • approximate discount to fair value: 23%
  • DK rating: potentially good buy
  • historical fair value: 17 to 18 PE
  • current blended PE: 15.5
  • Earnings yield (Chuck’s “essence of valuation”): 6.5% vs 6.7% recommended
  • Growth priced into stock: about 3.5% CAGR according to Graham/Dodd fair value formula
  • Growth priced into stock based on historical PEG: 3.5% CAGR
  • long-term growth consensus: 6.0% CAGR
  • the margin of error adjusted analyst long-term consensus growth forecast: 2% to 10% CAGR
  • 5-year total return potential: 11% to 18% CAGR (analyst consensus 14.3% CAGR)
  • PEG ratio: 2.63 vs 4.39 historical 2.81 S&P 500 vs 2.35 historical S&P 500
  • Investment Decision Score: 94% = A excellent

NFG Investment Decision Score

Goal NFG Why Score
Valuation Potentially good buy 23% undervalued 4/4
Preservation Of Capital Average BBB- stable credit rating = 11% 30-year bankruptcy risk 5/7
Return Of Capital Exceptional 23.4% of capital returned over the next 5 year via dividends vs 10.3% S&P 500 10/10
Return On Capital Exceptional 10.7% PWR vs 3.2% S&P 500 10/10
Relative Investment Score 94%
Letter Grade A excellent
S&P 73% = C (market-average)

(Source: Dividend Kings Investment Decision Tool)

NFG is as close to an oil producer I’ll ever recommend in a recession for conservative income investors. The stability of its cash flows, courtesy of its 60% regulated business, is far superior to the likely of Exxon (XOM) or Chevron (CVX), the safest integrated oil producers.

The 50-year dividend growth streak is a testament to the conservative dividend friendly corporate culture and a management team that is dedicated to delivering generous, safe, and growing income in all economic and industry climates.

The Ultimate SWAN Stock Portfolio

The average 15-year volatility for stand-alone companies is 26.7%. The average of these 15 blue-chips, is 19.7%. But because we weighted the portfolio to minimize low volatility the weighted long-term volatility is just 18.7%.

The portfolio also yields 4.2%, which is 2.5X the S&P 500’s yield and slightly better than (VYM), the Vanguard high-yield ETF.

We have 10/11 sectors represented here, with no sector more than 20%, and no industry more than 15%. In other words, these 15 low volatility companies represent a well-diversified portfolio.

However, we need to confirm that these 15 companies are actually as safe as we think.

(Source: imgflip)

Fundamental On These 15 High-Yield Low Volatility Blue-Chips

  • Average quality score: 8.9/11 Blue-Chip quality vs. 9.6 average dividend aristocrat
  • Average dividend safety score: 4.6/5 very safe vs. 4.5 average dividend aristocrat (about 2.5% dividend cut risk in this recession)
  • Average FCF payout ratio: 58% vs. 66% industry safety guideline
  • Average debt/capital: 43% vs. 48% industry safety guideline vs. 37% S&P 500
  • Average yield: 4.1% vs. 1.7% S&P 500 and 2.2% aristocrats
  • Average discount to fair value: 13% vs. 43% overvalued S&P 500
  • Average dividend growth streak: 32.5 years vs. 41.8 aristocrats, 20+ Graham Standard of Excellence
  • Average five-year dividend growth rate: 5.9% CAGR vs. 8.3% CAGR average aristocrat
  • Average long-term analyst growth consensus: 6.4% CAGR vs. 6.4% CAGR S&P 500
  • Average forward P/E: 13.8 vs 15.9 historical vs. 23.5 S&P 500
  • Average earnings yield (Chuck Carnevale’s “essence of valuation”): 7.3% vs. 4.3% S&P 500
  • Average PEG ratio: 2.16 vs. 2.48 historical vs. 2.76 S&P 500
  • The average return on capital: 131% (76% Industry Percentile, High Quality/Wide Moat according to Joel Greenblatt)
  • Average 13-year median ROC: 103% (improving moat)
  • Average four-year ROC trend: -5% CAGR (turnarounds during the recession)
  • Average S&P credit rating: A- vs. A- average aristocrat (2.5% 30-year bankruptcy risk)
  • Average annual volatility: 19.7% vs. 22.7% average aristocrat (and 26.7% average Master List company)
  • Average market cap: $50 billion large-cap
  • Average four-year total return potential: 4.1% yield + 6.4% CAGR long-term growth +2.8% CAGR valuation boost = 13.3% CAGR (6% to 20% CAGR with an appropriate margin of error)
  • Average probability-weighted expected average five-year total return: 3% to 16% CAGR vs. 1% to 6% S&P 500
  • Average Mid-Range Probability-Weighted Expected 5-Year Total Return: 10.0% CAGR vs. 3.2% S&P 500 (217% more than S&P 500)

We’re looking at an effectively

  • dividend aristocrat portfolio
  • with low volatility
  • a high safe yield of 4.1% (4.2% as we’ve weighted it)
  • very strong returns on capital
  • an average credit rating of A- stable = 2.5% 30-year bankruptcy risk

Investment Decision Score

Goal Ultimate SWAN Portfolio Why Score
Valuation Potentially reasonable buy 13% undervalued 3.00
Preservation Of Capital Excellent Average A- stable credit rating = 2.5% 30-year bankruptcy risk 7.00
Return Of Capital Exceptional 24.8% of capital returned over the next 5 year via dividends vs 10.3% S&P 500 10.00
Return On Capital Exceptional 10.0% PWR vs 3.2% S&P 500 10.00
Relative Investment Score 97%
Letter Grade A excellent
S&P 73% = C (market-average)

(Source: Dividend Kings Investment Decision Tool)

This portfolio represents one of the most reasonable and prudent investment decisions conservative income investors, such as retirees, can make in this dangerous market bubble.

But for confirmation of the quality of these companies, and the prudent nature of potentially investing in them today, let’s turn to the ultimate arbiter of quality and value, the stock market itself.

Historical Market Returns: The Ultimate Proof Of Quality

(Source: imgflip)

Over the long-term, the market is almost never wrong about the value of a company. In fact, 90% to 91% of long-term returns are a function of fundamentals.

Time Frame (Years)

Total Returns Explained By Fundamentals/Valuations

1 Day 0.05%
1 Month 0.9%
3 Months 2%
6 Months 4%
1 8%
2 18%
3 27%
4 36%
5 45%
6 54%
7 63%
8 72%
9 81%
10+ 90% to 91%

(Sources: Dividend Kings S&P 500 Valuation & Total Return Tool, JPMorgan Asset Management, Bank of America, Princeton, RIA)

So how did these 15 companies, most of whom are currently in a bear market, do over the long-term?

Ultimate SWAN Portfolio Since January 2003 (Annual Rebalancing)

(Source: Portfolio Visualizer)

Keep in mind that today these companies are modestly undervalued (why we’re considering them) and the market is in the 2nd biggest bubble in US history.

Yet they have still managed to match the market over the past 17 years, a time period when 91% of returns are explained by fundamentals.

9% of returns will always be a function of luck, such as the timing of individual company bear markets.

  • Yield in 2003: 4.1% = identical to today
  • Yield on cost in 2019: 21.2%
  • Dividend growth over the last 16 years: 10.9% CAGR

If you adjust for their 13% undervaluation, these 15 low volatility, high yield blue-chips delivered 10.9% CAGR total returns over the last 17 years (prior to the COVID pandemic). In other words, they beat the market by 7%.

What are we expecting in terms of returns from this portfolio? 10.0% probability-weighted total returns. Even with their current bear market what did these 15 blue-chips deliver? 10.1% CAGR.

Predicting long-term returns within a reasonable margin of error is not actually hard. That’s not just my opinion it’s an empirical historical fact that backed up by

  • Economist Myron Gordon
  • Economist Eli Shapiro
  • Economist Robert Shiller
  • Bloomberg
  • most asset managers (including JPMorgan, Brookfield Asset Management, and OakTree capital)
  • Chuck Carnevale and all the Dividend Kings
  • Ben Graham
  • Vanguard founder Jack Bogle
  • Ritholtz Wealth Management’s Ben Carlson

The emotional component of investing will never be quantifiable because it’s impossible to predict how people will feel in the future.

The late Jack Bogle introduced this concept in his book Don’t Count On Itby breaking down expected annual returns of the U.S. stock market into the following components:

Market Returns = Dividend Yield + Earnings Growth +/- Changes in the P/E Ratio” – Ben Carlson (emphasis added)

21% Superior Risk-Adjusted Returns From Beating The Market Just 53% Of Years

(Source: Portfolio Visualizer)

  • The stock market goes up 52% of days
  • Renaissance Tech, the most successful hedge fund in history (39% CAGR returns since 1988) is right just 52% of the time.

(Source: imgflip)

Being right just 52% to 53% of the time is enough to achieve your financial goals over time.

We can see further evidence of that by looking at the Ultimate SWAN portfolio’s rolling returns over 10 and 15 year periods, which represent statistically significant periods when fundamentals are 10X as powerful as sentiment and luck.

(Source: Portfolio Visualizer)

  • average 10-year rolling return outperforms S&P 31% annually
  • average 15-year rolling return outperforms the market by 25%
  • lowest 10-year rolling return outperformed the market by 58%
  • lowest 15-year rolling return outperformed the market by 32%
  • the longest period of negative rolling returns 1 year vs 5 years for S&P 500

And let’s not forget the main goal of this portfolio

  • generous, safe, and growing dividends
  • sufficient returns to sustain your standard of living in retirement
  • with the minimum amount of volatility

Historical Volatility Analysis

(Source: Portfolio Visualizer)

It took the S&P 500 58 months to recover new record highs after the Great Recession. It took the Ultimate SWAN Portfolio just 22 months.

Those 36 months faster recovery could have easily made the difference between becoming a forced seller of objectively high-quality blue-chips at a loss, or not.

(Source: JPMorgan Asset Management)

Over the last 13 years, this portfolio captured 76% of the market’s upside with 44% less downside.

Even with the current bear market for these companies, and the market’s 2nd biggest bubble in history, over 13 years (90% of which is fundamentals, 10% luck) this portfolio matched the market.

But with 19% less volatility, resulting in 20% superior volatility-adjusted returns.

Does this portfolio outperform in every downturn? No portfolio can do that. What matters is the long-term as well as how a portfolio performs in a variety of market conditions.

Outperformed Market In Every Correction Of The Last 10 Years

(Source: JPMorgan Asset Management)

Even though these 15 companies are currently out of favor they still managed to collectively outperform the market in every correction of the last decade.

Lags Market In Recoveries…As Expected From A Low Volatility Stock Portfolio

(Source: JPMorgan Asset Management)

Remember that low volatility isn’t meant to outperform in market rallies. This portfolio captured 77% of the market’s upside over the past 13 years and delivered superior risk-adjusted returns courtesy of falling 44% less during corrections.

Outperformed In 5/6 Of The Last Falling Rate Environments

(Source: JPMorgan Asset Management)

During periods of economic uncertainty, these defensive high-yield blue-chip tend to outperform by significant amounts.

During Rising Rate Environments, It Tends To Lag…Just As Expected

(Source: JPMorgan Asset Management)

But while historical returns are a useful guide to what MIGHT happen in the future, ultimately all dividends and profits are made in the future.

Future Volatility Risk Analysis

JPMorgan’s economist team is considered one of the 16 most accurate out of 45 tracked by MarketWatch. That team has compiled a variety of short and long-term risk scenarios for investors to consider.

(Source: JPMorgan Asset Management)

If junk bond credit spreads widen significantly in a mini-financial crisis, stocks are expected to fall about 6.5%, and this portfolio the same.

If 10-year yields rise by 1.5% in one to two years, rather than the decade most economists expect, bonds are expected to fall 11%. Stocks, courtesy of the stronger economy that would allow such a strong rise in long-term rates, would be expected to go up about 12% and this portfolio 13%.

Stocks are NOT a bond alternative. If they were rising rates would be bad for stocks. Fundamentals, meaning earnings and cash flows are what drive stock prices in the LONG-TERM, not interest rates.

(Source: JPMorgan Asset Management)

JPMorgan’s blue-chip economists expect this portfolio to

  • match the market if the pandemic goes better than expected
  • match the market in a bear market should we get a double-dip recession (25% probability according to 80% of economists)
  • match the market in moving an insignificant amount no matter who wins the November election
  • match the market’s pullback if the US/China trade deal falls apart
  • outperform by about 1% if a future inflation spike causes the Fed to hike short-term rates too far too fast and trigger a mild recession

But isn’t this portfolio meant to have lower volatility? And so isn’t JPMorgan saying that it will no longer serve that function? That’s indeed what JPMorgan’s model is saying.

However, this is just the stock portion of a full portfolio. When constructing a crash-proof SWAN retirement portfolio stocks are just one part of the equation.

Turning The Ultimate SWAN Portfolio Into A Crash-Proof Bunker Retirement Portfolio

Think about bonds in terms of protection, not yield. The stock market becomes more important when rates are on the floor but that doesn’t mean you can forsake bonds or cash altogether.

In a negative interest rate world, you have to change the way you think about bonds. Bonds have always acted as a shock absorber to stock market declines but this becomes even more important when the yield is more or less taken out of the equation.

Bonds can provide dry powder to rebalance into the stock market or pay for current expenses when the stock market inevitably goes through a nasty downturn. Bonds keep you in business even if they don’t provide high returns as they have in the past.” – Ben Carlson (emphasis original)

Bonds are the least volatile asset class in history, averaging just 3% annual volatility since 2005.

That’s five times less volatility than US large-caps.

Not all bonds are created equal of course. Risk-free sovereign debt is the only form of bonds with negative correlations that make them effective correction hedges.

US Treasuries Are Historically The Best Recession Hedge

(Source: Duke University)

According to Duke University, US Treasuries have historically been the most effective hedging strategy in recessions. They deliver similar protection when stocks are crashing while delivering the best positive total returns across the economic cycle.

Remember that 86% of the time the US economy is growing, so you want to use asset allocation that will benefit from the long-term uptrend in the economy.

What is a good asset allocation for most people?

  • Ben Graham considered a 75/25 to 25/75 stock/bond asset allocation reasonable for most people (though in a much higher interest rate world)
  • 60/40 stocks/bonds are the basis of the 4% drawdown rule invented by CFA William Bengen in 1994 (also in a higher rate world)
  • 90/10 to 20/80 stocks/bonds are the range of asset allocations recommended by most asset managers today
  • 75/25 stocks/bonds are Wharton Business School Professor Jeremy Siegel’s recommendation to most of his asset management clients, the “new 60/40” in a low rate world

(Source: UBS)

You can use historical bear market data for various asset allocations to determine a prudent asset allocation for your needs, goals, and risk profile.

Just remember that due to rising rates expected over the next 10 years bond returns are likely to be 0% to 1% CAGR, much lower than in the past. This is why Professor Siegel and many asset managers consider it potentially prudent to increase your allocation to stocks to generate sufficient returns to meet your goals.

So let’s test out three versions of a crash-proof Ultimate SWAN Portfolio.

75/25 Ultimate SWAN Portfolio (Professor Siegel’s Recommendation)

60/40 Ultimate SWAN Portfolio (The Old Gold Standard)

30/70 Ultimate SWAN Portfolio (As Conservative As Vanguard Recommends Retirees Get)

Bottom Line: Corrections & Even Outright Market Crashes Are Inevitable But A Bunker SWAN Portfolio Can Protect Your Retirement Dreams No Matter What Happens In The Future

Is the market dip going to turn into a pullback, correction, or a new bear market? I don’t know, nobody does.

But the short-term irrational price swings of the broader market or any particular stock are not important to achieving your long-term financial goals.

If you own a diversified and prudently risk-managed crash-proof SWAN retirement portfolio, such as I’ve constructed in this article, you need never fear short-term volatility, no matter its cause or severity.

Today ED, UGI, T, TRV, AROW, TRP, CB, MO, IBM, MMM, NFG, SNY, ESS, SON, and SXT represent reasonably to attractively priced high-yield, low volatility blue-chips retirees can safely buy in this dangerous market bubble.

UGI and NFG are two of my favorite recommendations right now, representing blue-chip bargain dividend champion and king utilities that are dependable sources of income and proven long-term market beaters.

Over the past 17 years, these 15 blue-chips have averaged 12% annual volatility, 20% less than the S&P 500 while delivering equal returns, and 21% superior risk-adjusted returns.

Using a prudent asset allocation of cash/bonds you can potentially drive long-term volatility down to as low as 4% CAGR, which represents the ultimate crash proof SWAN retirement portfolio.

Regardless of your personal risk profile, time horizons, or goals, you can use these 15 high-yield low volatility blue-chips to build a portfolio that

  • generates relatively generous, safe, and growing income
  • is likely to outperform an appropriate benchmark in the future (due to superior valuations)
  • can deliver sufficient returns to meet your retirement goals
  • with the minimum amount of volatility to let you sleep well at night no matter what the economy, pandemic, or stock market are doing

(Source: imgflip)

Many people think you need luck to achieve a comfortable retirement. In fact, you need just four things

  • sufficient savings (76% of retirement success is based on savings rate)
  • a sound strategy for those savings (your facts and reasoning being right)
  • prudent risk management and asset allocation (a crash-proof SWAN portfolio)
  • the patience and discipline to trust your portfolio’s risk-management during market downturns to avoid becoming an unnecessary forced seller at a loss

I’ve devoted my life to helping readers and DK members achieve their financial goals by becoming good stewards of their hard-earned savings. Let the traders and speculators treat Wall Street like a casino.

You and I, prudent long-term investors, know that Wall Street is indeed a casino.

But rather than roll the dice at the craps tables, through proper portfolio construction, we are turning ourselves into the house.

In Vegas, anything can happen in the short-term, when luck dominates results, just like on Wall Street.

Over the long-term, the results are never in doubt, because the outcomes are 100% a function of probability, statistics, and math.

(Source: AZ Quotes)

Rather than fear a pullback or correction, prudent long-term investors await one with glee.

Because while something great is always on sale, even in a bubble, during market downturns you can lock in even better blue-chip bargains.

This means higher safe yields, and stronger future returns, from the highest quality and safest dividend-paying blue-chips on earth.

The good long-term investor accepts and tolerates short-term volatility.

The great long-term investor embraces and harnesses it for their benefit.


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Disclosure: I am/we are long UGI, TRV, CB, MO, MMM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Dividend Kings owns UGI, TRV, CB, MO, and MMM in our portfolios.

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