Death of the
Dollar Portfolio

Welcome to our most controversial and aggressive portfolio ever crafted: the Death of the Dollar Portfolio. Few investment outlooks or forecasts have been as strong and pervasive during the last 20 years than the prediction that the US dollar will either decline or completely collapse in value. While it is true, the last 20 years has not been kind to savers who hoard dollars or investors who buy CD’s, the next 20 years could be even worse. Governments around the world have printed and supplied their markets will a seemingly limitless supply of currency to ease the pandemic and spur economic growth. Instead of fighting this trend we want to capitalize on it.

Asset Oriented Mindset Part 5

This article is part 5 of 6 which explains and outlines the Asset Oriented Mindset. The AOM is about how the rich and wealthy think about money and how they accumulate wealth. You can read all four previous articles by following this link to the AOM landing page. A key principle about the wealthy is that they are pliable, opportunistic, and always ready to learn. If you are bearish on the dollar going forward then here is an idea you might consider. This is not your typical portfolio and therefore will give atypical returns.

The 60/40 is Now Dead

The old ways of investing don’t always work going into the future and we need to constantly test our assumptions. Forbes says the typical 60/40 portfolio will likely yield inferior returns going forward. At current interest rates, bonds or cash bearing investments, have little ability to buffer or diversify the stock portion of a portfolio. We’re at the point where anticipated future returns are negative. For example, the government 10 year bond is priced to return 0.8540% a year. After taxes and inflation, these returns will be negative.

We need new ideas and we need to seek new opportunities.

Here is the outline for today’s blog post, the Death of the Dollar Portfolio:

Risky ‘n Aggressive

Full disclosure on this portfolio: it is risky and aggressive by every measure of portfolio performance. The volatility will be strong. While you should not lose all of your money, it stands within reason that you could lose a lot of it very easily and very quickly. However, if I was convinced of the dollar’s imminent collapse, this is how I would allocate my assets to protect or take advantage of the movement.

Portfolio Construction

We’re after assets that are immune to the falling dollar and protected from the collapse of it’s buying power. To this end here are the assets we want, the reasons why, and how much we would allocated to them.

US Stocks

Rationale: Some of the best managed businesses in the world are based in the U.S. While they operate with USD, they will weather the weak dollar through management, innovation, and pricing power. In addition, much of their profits are realized internationally and this will help them offset softness at home. In the case that inflation happens slowly, the pricing power many of these companies have will help them manage through. Pricing power is critical for companies when managing through inflation. It enables them to quickly pass along price increases to consumers when their input costs rise. Here we want large established companies over small, so pick the S&P 500 and not the total investible market.

Canadians go with XEQT so you have global equity exposure all in one with a large allocation to the U.S. built right in.

Allocation: 12.5%

Investible Asset: Americans Investors: SPY / Canadian Investors: XEQT

International Stocks

Rationale: This one should make more sense than the U.S stocks. We want international companies that operate on currencies other than the USD. Again we hope their management and innovation can weather the storm and generate profits. If the inflation and decline of fiat currencies continues to be slow then the companies can manage through pricing power and leveraged debt. Again we favor large international stocks over smaller issues. The ETF is USD based and if the dollar collapses we anticipate a strong upward surge as the USD tries to accurately price these foreign stock.

Canadians, keep your international allocation squared with XEQT.

Allocation: 12.5%

Investible Asset: American Investors: IEFA / Canadian Investors: XEQT

TIPS

Rationale: Treasury Inflation-Protected Securities offer a straight forward inflation protected investment. Yes, these are USD based investments, however their returns are calculated and tied to inflation. Should inflation rise, the natural course of government action will be to increase interest rates and try to increase the value of the dollar. The par value and interest payments will rise to match the reported inflation numbers. In the event of hyperinflation this may not offer the best protection as CPI numbers could be manipulated. However, during periods of low to medium inflation these should offer you fantastic returns.

Canadian investors should pick their CAD equivalent, and we recommend ZRR.

Allocation: 25%

Investible Asset: American Investors: TIP / Canadian Investors: ZRR

Gold

Rationale: Gold is the naturally sought after asset during periods of uncertainty and political instability. When the dollar collapses investors will rush for hard assets and gold will be at the top of the list. It has held value since the dawn of time and it will continue to hold value well into the future. The dollar falls against gold as gold stands static as a store of value. Given the nature of our prediction, we want physical gold held outside of the financial system so no ETF’s here. Buy the pure physical precious metal such as bars, bullion, or coins. Consider also how you will store and protect it because if things go to pot you will need it.

Allocation: 25%

Investible Asset: Physical Gold. I like buying mine from SilverGoldBull.com and they serve both U.S. and Canadian clients.

Bitcoin

Rationale: Bitcoin offers what might be the best protection against inflation and government manipulation. It is a digital form of money that is bought and sold very easily online and stored on a physical cold wallet. Due to its global decentralized nature, it cannot be controlled by any one government. Guaranteed funds can be sent electronically to anyone who has a bitcoin wallet. This transaction is completed quickly and without the need of a bank or government institution. In addition, it is a deflationary currency, meaning less and less will be issued each year and this increases scarcity.

If you haven’t read my article on why you should invest in Bitcoin, you should give it a read after this. You can find it here: Four Reasons You Should Invest in Bitcoin. It further elaborates on why this is a unique investment and how it can provide incredible returns against a falling dollar.

Allocation: 25%

Investible Asset: BTC on a cold wallet. I personally use the Ledger wallet.

Portfolio Performance

We opened this article with the statement that we don’t know what the future of this portfolio will be, which honestly is the same for all portfolios, but the magnitude of unpredictability here is even greater. It is so heavily reliant on the future performance of Gold and Bitcoin yet the latter is only 11 years old. I suspect that the returns will binary; they will be absolutely incredible, or abysmal.

With this said, lets look at the historical performance. We will go back to January 2015 because going back further produces even more performance skew towards Bitcoin. Trust me, it gets ridiculous.

Portfolio Configuration

$10,000 into our Death of the Dollar Portfolio
$10,000 into the Vanguard 500 Index for comparison and a control variable
No additional contributions
Rebalance Annually
No trading commissions
No taxes
Reinvest dividends and Interest
Simulation run at Portfolio Visualizer

Incredible Returns

The returns of our Death of the Dollar portfolio has been nothing short of amazing. A 55% annualized return for 5 years is absolutely incredible. Now, lets return to reality and realize that these returns will not be repeated over the next 5 years. However, I do believe it will offer incredible protection against inflation and a collapsing dollar. Let’s explore the scenarios where this portfolio will succeed and possibly fail.

Future: How it Succeeds

This portfolio should offer superior returns compared to any tradition stock and bond portfolio in the given future scenarios:

Low to Medium Inflation

Should the next 5 to 10 years experience low to medium inflation, say 1% to 3%, half the components of the portfolio should perform well. The businesses within the equity portion will be able to use pricing power to manage through and grow. Rising CPI will be reported which the TIPS component will handle as expected. Interest rates will rise to control inflation which will have a negative effect on gold prices. Especially if the Fed is able to control and keep inflation on target. The opportunity cost of holding gold will weigh it down because it pays no interest. The Bitcoin portion of portfolio is an unknown. It could behave like gold and decline, or perhaps continue upwards based on the inflation story. If Bitcoin’s inflation stays lower than the dollar’s it should rise in relative value. However, the fact remains that Bitcoin has never existed in a healthy interest rate environment with mild inflation, so it remains a speculative bet.

Medium to High Inflation

Should we enter a period where inflation is medium to high, say 3-6%, the stock and equity portion will likely struggle. Input costs will be rising and it could be difficult for them to pass along the higher prices to consumers fast enough. Returns would likely stagnate. TIPS will perform perfectly and as expected, as the reported CPI will raise the principle and interest payments. Governments will raise interest rates quickly and this will negatively impact gold prices, again, as the opportunity cost rises. Bitcoin, again is an unknown. We have never had digital currency in this scenario. This being said, gold and Bitcoin will do well in the face of high interest rates, if the Fed is unable to control inflation. Investors will fear where things are going and buy these two assets regardless of opportunity cost. Interest paid on trash currency is still trash.

High to Hyper Inflation

This is where it gets interesting. Businesses and stocks will really struggle to keep up with the continual rise of input costs and wage demands of employees. Things will fall apart. Bartering will be rampant, and it will be difficult but not impossible, for businesses to survive let alone grow. Stocks in Oil, Gas, Timber, Gold, etc. will all do well. TIPS will likely crater as despite being a protection for inflation, the government will start fudging CPI numbers or start defaulting on the loan. Gold will rise to heights never before seen as the dollar will lose all ability to accurately price the precious metal. Bitcoin will reign supreme as its impressive ability to store untold millions or billions of dollars on a single cold wallet will offer ultimate protection and portability. As it can be divided down to 8 decimals it will be a preferred method of payment for any and all goods. It will be thoroughly trusted despite government efforts to regulate and control it.

Future: How it Fails

Okay, lets keep things honest and look into how this Death of the Dollar Portfolio could fail to provide good returns.

Rising Interest Rates that Controls Inflation

If the Federal reserve is able to meet their inflationary targets and raise interest rates to healthy levels, only the stock and TIPS portion will do well. The stability, controlled inflation, and healthy interest rates will be acidic to gold and its price will collapse. The perfect tonic to rising gold prices is political stability, a growing economy, with reasonable interest rates. Bitcoin will struggle along with gold here, but again, because we haven’t seen it in such an economic environment it is difficult to say how it will perform. At best it will just troddle along with fan boys touting how incredible it is to hodl it.

Bitcoin Regulation, Legality and Hacking

The biggest threats to Bitcoin are government regulation, the legality of the currency, and hackers proving the network or exchanges are not secure. Any of these will be disastrous to Bitcoin and all cryptocurrencies. How likely are these to happen? That is the real question but these are also not new issues. During the last 10 years Bitcoin has faced numerous regulatory hurdles, hacks, and legal threats to its operations. It is illegal to hold or mine Bitcoin in some countries and while the list is short the list can change. The following excerpt from Investopedia outlines the method by which the technology behind Bitcoin, called blockchain, could be hacked.

51% Attack

“Succeeding with such a hack would require that the hacker simultaneously control and alter 51% of the copies of the blockchain so that their new copy becomes the majority copy and thus, the agreed-upon chain. Such an attack would also require an immense amount of money and resources as they would need to redo all of the blocks because they would now have different timestamps and hash codes.

Due to the size of Bitcoin’s network and how fast it is growing, the cost to pull off such a feat would probably be insurmountable. Not only would this be extremely expensive, but it would also likely be fruitless. Doing such a thing would not go unnoticed, as network members would see such drastic alterations to the blockchain. The network members would then fork off to a new version of the chain that has not been affected.

This would cause the attacked version of Bitcoin to plummet in value, making the attack ultimately pointless as the bad actor has control of a worthless asset. The same would occur if the bad actor were to attack the new fork of Bitcoin. It is built this way so that taking part in the network is far more economically incentivized than attacking it.”

Still…. Bitcoin Should Survive

Despite these challenges, it is likely that Bitcoin will survive, however it may not reach the $100,000 price per coin, let alone the $1,000,000 price predictions some have touted. What’s more likely is governments will try to control and temper the attraction to the cryptocurrency space and keep it range bound.

Never discount the possibility of a black swan event for Bitcoin or Cryptocurrencies. To say it is not possible is hubris and naivety. Consider for a moment that while no one hacker could pull off the 51% attack, perhaps a country such as China or the U.S. could do so given the right incentive to discredit Bitcoin and all cryptocurrencies.

Summary

Well there you have it! The Death of the Dollar Portfolio. Do I recommend you do it? NOPE! its just too risky. Rather we believe a more balanced approach as outlined in our recently updated portfolios and following the principles outlined in our Four Pillars for Investing Success.

So why this article then if there’s no recommendation? Well two things. First, be open to new investing ideas and opportunities as they present. The lessons and techniques that worked for the last 20 years may not work for the next 20 years. Second, if you’re convinced high or hyper inflation are on the horizon then add some TIPS to your portfolio and increase your gold and bitcoin holdings. These three assets offer incredible protection and superior returns in the face of uncontrolled inflation. How much of each? well I’ll leave that up to you to decide!

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