Tom Nash
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The Perfect Investing Strategy (High Reward, Extremely Low Risk)
🕑 Added 2025-01-16 14:35:06 +0000 UTCEvery new investor dreams of the “Holy Grail” of investing.
Something that is high reward but also risk free.
However, real life isn’t really like that. In this article, we will break down the myth vs. reality and explain the right way to invest in the stock market. We will also learn about bear markets and see how various asset classes behave in each case.
Get ready, because by the end of reading this you will know why there is no such thing as a “perfect” investing strategy, why “hedging” might backfire if you’re not careful, and how to think about the trade off between lower volatility vs. higher returns.
Anyone who has been dabbling in the markets for just a few months knows the stomach churning feeling of losses. We all desire an approach that always provides us with certain wins, or at a minimum, doesn’t lose too big when the market gets hit.
And the market does get hit more often than people tend to realize. Over the past couple of decades, we’ve had:
The Great Financial Crisis (2008–2009), with a 50% meltdown in stocks.
Mini-crashes like 2011 (European debt crisis), 2018 (trade war fears), and a few more.
The COVID-19 crash in 2020 (–30% at lightning speed).
The 2022 bear market driven by inflation and rate hikes.
Each time the market tanks, even for a few weeks, it’s terrifying if you’re heavily in stocks. Many folks say, “Hey, is there a way to protect ourselves so we don’t lose 30%, 40%, or 50% of our portfolio?”
Well, yes: meet AWP - the All Weather Portfolio.
AWP: The Logic Behind It
Stocks generally thrive when the economy is growing, interest rates are reasonable, and corporate earnings are up. Long Term Treasury Bonds can rally when interest rates fall (which usually happens in recessions as central banks try to stimulate the economy). Commodities can surge during inflationary periods when raw material prices spike. Gold often moves higher when the U.S. dollar weakens, and may outperform in certain downturns.
By combining all of these, the theory goes, at least one or two pieces of the puzzle will be doing well (or holding steady) when others are crashing. This cushions your downside and keeps your portfolio from crashing 50% in a bad year, at least hopefully.
One of the most important distinctions in market meltdowns is determining why everything is crashing. Broadly, there are two distinct categories - Recessionary or Inflationary.
Recessionary Bear Markets
Typically triggered by economic slowdowns, financial crises, or some shock (like the subprime crisis in 2008 or the COVID-19 lockdown in 2020).
The Federal Reserve (or other central banks) usually cuts interest rates to stimulate growth.
When rates are cut, bonds often rally because bond prices move inversely to interest rates.
A lower U.S. dollar can cause gold to rally.
Commodities often slump, because a weaker economy means less industrial demand.
Inflationary Bear Markets
Here, the primary worry is rising prices and an overheating economy (or supply shock), forcing central banks to raise interest rates. Think 2022.
When rates rise, bonds get hammered (they drop in value).
The U.S. dollar often goes up. Gold tends to struggle if rates rise aggressively, though it can still sometimes hold value if people see inflation as out of control—this part can be complicated.
Commodities can soar because inflation often means commodity prices themselves are going up (like in the 1970s surge in oil prices).
So bonds and gold typically do well in recession driven crashes (since rates are cut), while commodities do well in inflation driven crashes (since real assets become more valuable).
That’s the main puzzle piece for an All Weather approach.
The 2008 Great Financial Crisis
Stocks: The SP 500 plummeted over 50%.
Long-Term Treasury Bonds rose in value because the Fed slashed rates to near zero.
Gold: The U.S. dollar weakened, so gold prices climbed.
Commodities: Collapsed alongside stocks because of the severe economic downturn.
Hence, if you held an AWP (stocks + bonds + gold + commodities), you’d see stocks and commodities dive, but your bond and gold holdings would rise, offsetting much of the damage.
The 2020 COVID Mini Crash
Stocks: Dropped ~30% in just weeks.
Bonds: Again, soared, because the Fed cut rates to rock-bottom.
Gold: Rallied as the U.S. dollar weakened.
Commodities: Collapsed with economic lockdowns.
Same story: “recessionary” style meltdown where the Fed’s rate cuts boosted bond and gold prices.
The 2022 Inflationary Bear Market
Stocks: Tumbled as rate hikes made future earnings less attractive.
Bonds: Crashed, because rising interest rates do the opposite for bonds.
Gold: Ended up flat to slightly down for much of the cycle (though it had short spikes).
Commodities: The big winner, especially oil, gas, and various raw materials. As inflation rose, commodities soared.
In that sense, the only shining star in 2022’s meltdown was commodities. So an AWP saw those commodity gains cushion the blow from falling stocks, bonds, and gold.
How exactly does an AWP portfolio breakdown? While there are variations floating around, one well known blueprint looks like this:
50% Stocks
40% Long-Term Treasury Bonds
5% Commodities
5% Gold
In theory, this balanced allocation ensures that if you’re blindsided by a recessionary downturn, your large bond holding plus gold picks up the slack. If you’re blindsided by inflation, your commodities slice bails you out. If neither happens, hopefully your stocks keep compounding nicely.
But there’s always a catch…
Nothing in life is free. The reason an All Weather Portfolios dampens crashes is because, frankly, you aren’t taking as much equity risk. Bonds, gold, and commodities might help you avoid catastrophic drawdowns, but they often underperform stocks over the long haul.
2007 to 2024
100% Stocks (SP 500)
About 10% to 14%.
All-Weather Portfolio
4–6% over the same period.
Lower volatility, smaller drawdowns, but less explosive upside.
The data often shows that in a bear market, the SP 500 can easily fall 20%, 30%, even 50%. Meanwhile, the diversified All-Weather might drop only 10%–15%.
That’s a real difference if you’re someone who cannot stomach big losses. However, over the full cycle, the pure stock investor typically ends up with far more money.
Who Wins? It Depends on Your Goals
It’s easy to ask, “So which is better, AWP or 100% stocks?”
The real question: What do you want out of investing?
If you have the stomach for volatility, believe deeply in long term growth, and don’t mind seeing your portfolio crater 30% or 40% in a crash, then 100% stocks might be your best bet. Historically, that’s the highest return route.
If you despise roller coasters, panic sell at a 10% drop, or you’re retired (and can’t afford massive drawdowns), then maybe an All Weather approach is a lifesaver. You trade away some upside to maintain saner nights of sleep.
Neither approach is “wrong.” It’s about matching your strategy with your temperament and financial needs.
Take Peter Lynch, who famously managed Fidelity’s Magellan Fund. Over 13 years, he averaged 30% annual returns, an astonishing feat.
But along the way, Magellan endured multiple drawdowns: 56%, 27%, 42%, and 32%. The big returns came hand in hand with big volatility. You couldn’t separate them.
That pattern shows up again and again with legendary investors. Their skill is in staying the course, not panicking when the portfolio drops 20% or even 50%. They hold or even buy more when prices fall, trusting their research that good companies bounce back.
We can talk about correlation coefficients, historical backtests, and fancy terms like standard deviation all day. But at the end of the day, investing success often hinges on behavior.
If you panic sell the moment your portfolio is down 15%, then, ironically, you might be better off with a more balanced approach that never sees you down more than 10%. Because it’s better to stay in the market with a calmer strategy than bail out on a 100% stock strategy at the first big drop.
If you can stay disciplined in a 100% equity position even during severe bear markets, that’s historically been the path to higher returns. But it requires a steel stomach.
Hence, no one size fits all solution.
If you do feel this is for you, don't forget rebalancing! Percentages will drift over time as markets move and you need to adjust the ratios as time goes by.
If you ask me, the real holy grail is adopting the long term mindset.
Here’s the ultimate perspective: the U.S. stock market, from a historical vantage, has soared from just a handful of points in the early 1900s to over 4,000–5,000 range on the SP 500 in modern times. Adjusted for splits and new entrants, that’s an astounding climb.
People who buy broad market indexes and hold for decades almost always come out far ahead, even after recessions, inflation, world wars, and pandemics.
But psychologically, it’s not easy. That’s why an AWP could be a compromise for those who want to stay invested without the trauma of a 50% crash. It’s not about outsmarting the market, it’s about staying in the market without letting fear sabotage your plan.
Want a middle ground? Plenty of investors do a hybrid approach:
Core Stocks + SP 500 Position
Bond Allocation: Maybe 20% in a bond ETF.
Small Slice of Commodities and Gold (or Bitcoin): Perhaps 5%.
Yes, that approach won’t rock the highest returns in a pure bull market, but it’ll hopefully keep you from losing sleep when we hit the next big slump.
One tempting idea: “Why not just move into bonds and gold right before a recession, then move back to stocks after the crash?” You’d theoretically have the best of both worlds. The catch: Timing the market accurately is notoriously difficult. Even professionals with advanced models get it wrong frequently.
Moreover, many of the biggest stock market gains happen in the early stages of a recovery often within a few days or weeks of the bottom. If you’re sitting in bonds, waiting for a sign that “the coast is clear,” you risk missing that explosive rebound.
For an individual investor, the takeaway is that if you have a long time horizon and solid emotional fortitude, you might fare best with a heavier equity allocation (or even 100% equities). If your risk tolerance is lower, an AWP can help you sleep at night, just know you’re sacrificing some potential upside.
So choose wisely, stay disciplined, and don’t jump off the roller coaster halfway through the ride. That might be the closest thing to real investment wisdom there is.
-Tom
Comments
MC
Thanks Tom. This is such a helpful article. I was trying to figure out how to build my portfolio, and you posted it in such a good timing. But still a lot to learn: stocks, bonds, now adding gold and commodities!😂
Island Boy
Tom, I believe the root cause of not being able to stomach temporary losses for most persons or bear markets is the *absence* of sound behavioral and psychological investment philosophy. You are the best investing coach I've came across and I can almost guarantee you folks would still fumble the bag, EVEN with S&P ETF or AWP. This is because they don't have a sound investment philosophy, so when the market goes awry, they look to the numbers only rather than timeless principles. A lot of persons laughed at me when I suggested maybe adding a book or two just for awareness of better investor mindset. All of those greats, Lynch, Marks, Klarman, Buffett talk about temperance, investment wisdom/logic/reframing, and essentially remaining stable during market turmoil. Imagine if you woke up every other day and because it's a gloomy, rainy day, we think that it's a "bad" day and do nothing. You wait until there is a day when the sun comes out and voila, it's now a "good" day to do something. That's almost ridiculous. I hate to be the bearer of bad news but the reality is that true stock investors (and I hope that's what most of the members are) NEED to learn how to stomach these bear cycles. It's part of the legendary investor skillset. Had it not been so, everyone would come out on top. I know you try to be nice but we got to learn to roll with the punches and what comes with the territory. I mean after all...we can't diversify our body parts....yet (🤖).
