How to invest like a cockroach

Building a portfolio that can survive anything, and still get a decent return, isn't impossible.

By MSN Money producer Feb 10, 2014 10:05PM

American cockroach © Smith Chetanachan/Getty Images
By Brett Arends, MarketWatch MarketWatch

Main Street investors withdrew billions of dollars from the stock market last week -- just before stock prices rallied.

And according to reports, they put the money into bonds -- just before they fell.


This latest example of bad timing was a reversal of what was happening in the weeks before Christmas. Back then, Main Street investors were pulling money out of bonds and throwing it into the stock market. Naturally, this was just before stock markets tumbled and bonds rose.


So many investors act like the proverbial cat on a hot tin roof, always in motion, always trying to guess which way to jump next. Will new Federal Reserve Chairwoman Janet Yellen stop "tapering" bond purchases if the job market remains weak? Will China tank? Will Puerto Rico default? Will inflation take off?   


By lucky happenstance, last week SG Securities' quantitative strategist Andrew Lapthorne directed my eye toward an absolutely fascinating piece of research, published just over a year ago by his erstwhile colleague Dylan Grice (who has since vanished into the maw of fund management).


To put it in a nutshell, Grice has advice for all of us: Don't be a cat on a hot tin roof … be a cockroach.


Say what?


"Cockroaches get bad press," Grice wrote in his research paper ("Cockroaches for the Long Run," SG Securities, November 2012). "They're pests. We don't want them in our houses. Mainly, we want to kill them." But, Grice added, cockroaches have one remarkable and underappreciated feature.


They're survivors. And how.


They've been around for 350 million years, which means they have so far survived 7,000 times longer than the human race. They've outlasted the dinosaurs, and millions of other species. They've survived three of the five "mass extinctions" that have swept the planet, each of which wiped out about three-quarters of the other species. "They can go without air for 45 minutes, survive submerged underwater for half an hour, survive freezing temperatures and withstand 15 times more radiation than humans."


No, they are not clever or inventive. But as Grice notes, cockroaches can survive a nuclear blast -- even if they can't build a nuclear bomb.


Wouldn't it be great if we were able to find an investment portfolio that was as robust? Wouldn't it be great if we could find a portfolio that we could just forget about, but which was designed to withstand whatever comes next?


This is a personal quest of mine. Thanks to my job, I really can't run an active portfolio. And, because I know my financial history, I know that the standard alternatives to an active portfolio -- those "balanced" and "target date" funds of stocks and bonds -- may well be a disaster waiting to happen.


I call the holy grail the "all-weather" portfolio. Grice calls it the "cockroach" portfolio. And in his paper he thinks he may have found it.


The cockroach portfolio

Grice's cockroach is a portfolio divided into four equal parts: Stocks, bonds, cash (i.e. deposits or Treasury bills), and gold bullion.


Why might this be a better solution than your "balanced portfolio" of stocks and bonds? Simple.


While stocks and bonds have done really well for the past 30 years, they got absolutely creamed during the inflationary 1970s. They also got creamed in the 1940s. Investors in the early 1970s who entrusted their wealth to a "balanced portfolio" of stocks and bonds ended up getting devastated by rising inflation.


"A real cockroach would survive the 1970s," Grice noted. "It would be inflation resistant, deflation resistant, credit-inflation resistant, credit-deflation resistant…"


A cockroach, being a simple, robust survivor, wouldn't try to guess what was coming next, he added: It would just be prepared for all eventualities.


Grice studied how this portfolio would have stacked up since 1970. And he found two remarkable things.


The first: It survived the traumas of the 1970s, and the financial crises of the past 14 years, really well.


Anyone who had entrusted their money to Grice's "cockroach" portfolio over the past 50 years would have slept very well.


In the crashes of 2000-03 and 2007-09, the cockroach portfolio's worst "drawdown" -- the worst drop in the value of a portfolio, from peak to trough -- would have been about 15 percent. That's when measured in constant, inflation-adjusted dollars.


Back in the 1970s, the portfolio's worst drawdown would have been about 20% between 1978 and 1981 (also in constant dollars).


Furthermore, the costs of this peace of mind were pretty minimal. Over 50 years, Grice calculated, this cockroach portfolio produced average investment returns, in excess of inflation, of about 5 percent a year.


That's not far short of the 5.5 percent a year on stocks, and well ahead of the 4% on bonds.


I checked the performance of the cockroach portfolio since Grice's paper was published. It lost about 9% last year, as tumbling gold and bonds offset booming stocks. But it is up about 3% so far this year, while stocks are down.


I have some reservations about this particular portfolio. Gold was officially "money" until the early 1970s, and the price had been artificially suppressed by central banks for the preceding 40 years. So in the 1970s gold investors enjoyed a huge one-off gain when gold prices were at last set free and played catch-up. I wonder if real-estate investment trusts, or timber, or oil, or inflation-protected government bonds might be a better substitute today. The trouble with gold, as ever, is that it generates absolutely no income whatsoever.


I also suspect that the future cockroach will benefit from holding truly global portfolios of stocks and bonds. Most investors hold the majority of their money in U.S. securities, limiting their diversification.


But it's interesting how Grice's "cockroach" resembles the portfolio held by Jakob Fugger "the Rich," the tycoon in Renaissance Germany. As Rob Arnott of Research Affiliates told me, Fugger held this wealth in a portfolio of equal parts stocks, bonds, gold and real estate.


What is really interesting is how far these portfolios differ from the conventional wisdom today of 60% stocks and 40% bonds. Few investors or money managers know their financial history. That is a huge danger.


As today's investors leap about like cats, Dylan Grice has the right idea. Don't invest like a cat. Invest like a cockroach!

More from MarketWatch

Feb 11, 2014 12:06PM

This is a bad analogy.  Roaches are ubiquitous and nimble.  They run away from danger when they sense it.  They won't willingly stick around if they knew a nuclear bomb were to go off near them and roast them.

For example holding gold only works a few times in several decades. Most of the time you'll be holding an asset that only loses to inflation.

The true trick is getting in while an investment vehicle is underpriced and holding it while the getting is good until it is fully priced, then getting away while you can.  That is being like a roach.

I just saw a cockroach buzz by me with a copy of the WSJ....

Cockroaches are survivors due to their sheer numbers and ability to prolifically procreate.

I would not base my portfolio on it though....

Feb 15, 2014 7:54AM
Feb 11, 2014 12:28PM
Is this an internship for JP Morgan Chase?
Feb 11, 2014 12:39PM
This is basically the Permanent Portfolio (Google it) and they've been doing this since 1982.  They invest about 25% each in stocks, gold/silver, cash and instead of bonds they use real estate/commodities (including some Swiss Francs).  A 7.95% annual return over the last 10 years.  I think the most beneficial part of the portfolio is the fact it's considered "permanent" and they're not trying to time the market - just a long-term buy and hold strategy.
Feb 11, 2014 4:34AM
sounds like a real douchebag wrote this article
Feb 11, 2014 11:33AM

I think we are discussing Day Traders and Professional Traders here with their HFTs and helter skelter methods of trying to time the Markets...?

I remember a few years back when most went broke, had margin accounts and or tax obligations that took many of them down...

Today cgt11 calls them scumbags and manipulators, I guess....Some are just investors.

Maybe we have come up with a new investor term..."Cockroachers"

Feb 15, 2014 1:28PM
I use to know a friendly cockroach yesterday,but it move to Washington .To be with the family So long buddy
Feb 11, 2014 1:58PM

Yup those Cockroachers, just grab the crumbs and run with them....Sometimes they get a little frosting too...

Time tested investment ideas and strategies have been around for ages or at least decades..

So have some time tested investors, that are very rich...

Following their Strategies, other's good advice and a plan, while doing your research or having a trusted advisor, can help many attain their goals.

Diversification, Re-allocations, and trading with intelligent information can make all the difference in success or failure...Long term with the right mix can work well also.

Feb 15, 2014 5:16PM
what's how to spend a piss ant...
Feb 16, 2014 1:28AM
How to invest like a cockroach:

Step the First:

Change your name to Mitt.

Step the Second:

Have dad drop a crap-pile of money into your hands.

Step the Third:

Lather, rinse, repeat.

Feb 15, 2014 11:20AM

"How to invest like a cockroach", really they want us to invest like politician's?


Feb 11, 2014 11:50AM
That was funny Sammy, my only question? Was he carrying an attaché case too or a laptop.?
Feb 15, 2014 1:57PM
Mmmmmm....   Chocolate dipped  "  Cockroaches  "
Feb 15, 2014 10:58AM
This article is really stupid.  All one needs to do is invest.  You don't need some 'fancy Dan' formula.  Look, if people don't start saving and investing the majority of their money pretty quick there won't be much reason to try it in the future because you won't have a future.
Mar 9, 2014 12:30PM
Here's an idea: publish other's ideas as your own.  Just take their concepts, put your new name on it, and spin it like it's something new.  Harry Browne called it the Permanent Portfolio years ago.  Now rebranded as the "Cockroach Portfolio".  No matter how you dress it up, this is a rip off of Harry Browne's original work.
Feb 11, 2014 11:47AM

Gold bullion may be okay for some....Small amounts are even easier to deal with....

But in my opinion, the small investor only thinks he has a good investment...

In reality the associates that are making the money, are the parties they deal with.

And occasionally the investor makes some.

On the other hand there are some precious metal miners "THAT DO pay dividends", and their stock varies with the price of the commodity.

Feb 15, 2014 10:31PM
I do not  like to be considered in the same thought as a cockroach under any circumstances. They could have considered another animal with superior resistance qualities in there article. My thoughts about investing in something that seems to be very stable is KO and MCD. They have paid quarterly dividends for several decades without missing a payment. They values have increased in that same time and they are international brands that everyone who is alive knows very well. I do not think they will fail during my lifetime. There are many more examples but I use these two because everyone knows and has probably had their products.
Feb 11, 2014 10:47AM
All grubber investors ARE cockroaches.
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

123 rated 1
262 rated 2
480 rated 3
651 rated 4
649 rated 5
629 rated 6
616 rated 7
496 rated 8
346 rated 9
111 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.