Inside today’s Daily Journal…

As you may know, I’ve recently written a new book, 2029: The End of America: Why The Age Of Paper Money Is Ending And How To Survive The Coming Monetary Reset.

I’m proud to tell you that it is now the #1 selling book on Amazon (in Wealth Management). We’re launching a special $4.99 Kindle offer on the book this week.

Why are we virtually giving the book away?

Because it is more important than ever that every American knows three things about what is about to happen.

1. The government is bankrupt and is going to engineer a massive, global monetary reset to escape its debt. The biggest victims of this will be Americans who are owed $100 trillion in Social Security benefits. By roughly 2029, the collapse of the Social Security system will become an inescapable reality. And, trust me, you will not get paid anything like what you are owed.

2. The age of paper money is ending because, all across the major Western democracies, paper money has allowed governments to accrue politically and culturally destabilizing debts, to finance endless foreign wars, and most critically to rob wage earners through the invisible tax of inflation. In the next crash, the demand of every free people will be, first and foremost, sound money.

3. To build a resilient portfolio, you cannot rely on bonds, as fixed income securities will be virtually destroyed in the coming monetary reset, just as they were in the 1970s.

So how can you build a truly resilient portfolio – something that you can absolutely depend on, come hell or high water? I spent a year researching that question. And I found the answer in a mathematical theorem that was discovered in 1773.

But before I explain the math, let me back up to explain what I believe is, by far, the most important concept in portfolio construction: pairwise correlation.

In 1990, Harry M. Markowitz won the Nobel Prize in Economic Sciences. He won because of a 15-page paper, “Security Selection,” that was published in 1952 in The Journal of Finance (volume 7, issue 1). Markowitz’s idea is that what matters in investing is not only each investment by itself, but how your investments behave together.

Think of your portfolio as a grocery bag. You might want to buy some things that come in glass bottles, because many people prefer bottles to cans. But if everything in your grocery bag is made of glass, one stumble on the way to the car and everything in the bag shatters. As you know, the market “stumbles” frequently. So, you need a “grocery bag” that isn’t made up 100% of glass.

Seems obvious, sure. But how do you define, mathematically, how diversified your portfolio actually is?

Answering that question is what won Markowitz the Nobel Prize. His research on pairwise correlation proved that if you mix several investments that are not correlated to each other (“pairwise”), you can get higher returns with less volatility. Pairwise correlation just means looking at each asset in your portfolio and measuring its correlation against all of the other assets. That gives you an average of all of the pairwise correlations. It is that average that defines, objectively, how much diversification benefit you actually get.

This kind of portfolio diversification is the only “free” return in investing. You can own high-performance stocks, in a low-volatility portfolio – if your positions are not correlated. That gets you the most return, for the least amount of risk.

Most investors think diversification means owning more stocks. It doesn’t. It means owning stocks that don’t move together. That’s a completely different idea — and almost nobody does it correctly.

Porter’s Permanent Portfolio achieves this by owning four equal buckets of assets (stocks, bonds, gold, and cash) that are not correlated. And, for decades, Wall Street has helped clients achieve this by creating 60% equity / 40% bond portfolios, as, since the 1980s, bonds have been negatively correlated to stocks.

The trouble is, as inflation becomes more and more permanent and structural (as the only way the government can finance its debt) the pairwise relationship between stocks and bonds has become highly correlated. And, of course, bonds are in their worst bear market ever.

So, the question I wanted to answer was:

For people who do not yet have enough assets to accept the lower (but safer) returns of a Permanent Portfolio, for people who genuinely need market-beating annual returns, is there a way to build a 100% equity portfolio that would have the same low-risk dynamics of a Permanent Portfolio?

In short: Is there a way to build a truly resilient portfolio that is 100% stocks?

And the answer is yes, but only if the pairwise correlations are extremely low.