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If your primary goal is reducing the impact of a market correction or recession, the portfolio should not simply own more stock ETFs. It should diversify across:
- U.S. stocks
- International stocks
- Dividend/value stocks
- Minimum-volatility stocks
- Treasuries
- TIPS (inflation protection)
- Short-term Treasury bills
- Real assets (REITs and gold)
The following 15-ETF portfolio emphasizes capital preservation, income, and diversification, while maintaining relatively low expense ratios.
Recession-Resistant ETF Portfolio
| ETF | Asset Class | Allocation |
|---|---|---|
| Vanguard Total Stock Market ETF (VTI) | U.S. Total Market | 15% |
| Vanguard S&P 500 ETF (VOO) | Large-Cap Core | 8% |
| Schwab U.S. Dividend Equity ETF (SCHD) | Dividend Stocks | 10% |
| iShares MSCI USA Min Vol Factor ETF (USMV) | Defensive Equities | 8% |
| Vanguard Value ETF (VTV) | Value Stocks | 5% |
| Vanguard Total International Stock ETF (VXUS) | International Developed & Emerging | 12% |
| Vanguard FTSE Developed Markets ETF (VEA) | International Developed | 5% |
| Vanguard Total Bond Market ETF (BND) | Core Bonds | 10% |
| Schwab U.S. Treasury ETF (SCHR) | Intermediate Treasuries | 5% |
| iShares 0-5 Year TIPS Bond ETF (STIP) | Inflation Protection | 5% |
| iShares 0-3 Month Treasury Bond ETF (SGOV) | Cash Alternative | 5% |
| SPDR Gold Shares (GLD) | Gold | 4% |
| abrdn Physical Gold Shares ETF (SGOL) | Gold Diversifier | 2% |
| Vanguard Real Estate ETF (VNQ) | Real Estate | 3% |
| Schwab U.S. REIT ETF (SCHH) | Real Estate | 3% |
Total = 100%
Why This Portfolio May Hold Up Better
1. Less Dependence on Growth Stocks
Many investors are heavily concentrated in technology and growth. Adding dividend, value, and minimum-volatility funds can reduce downside risk during bear markets.
2. Significant Bond Allocation (25%)
BND, SCHR, STIP, and SGOV provide stability and liquidity. Treasury-heavy allocations have historically cushioned equity declines during many recessions.
3. International Diversification
VXUS and VEA reduce reliance on the U.S. economy alone. VXUS provides exposure to thousands of companies outside the U.S. at a very low cost.
4. Inflation Protection
TIPS and gold can help if inflation remains elevated while economic growth slows.
5. Cash Reserve
SGOV invests in very short-term Treasury bills and can provide stability and liquidity during market stress.
Expected Behavior During a Recession
This portfolio is unlikely to avoid losses entirely if stocks fall sharply. However, compared with a typical 100% stock portfolio, it should:
- Experience smaller draw-downs
- Generate more income
- Maintain liquidity for rebalancing opportunities
- Recover more steadily after a downturn
For a retired investor drawing income, I would consider this a moderately conservative allocation (approximately 66% equity / 34% defensive assets).
If your focus is retirement income, I can also build a 12–15 ETF portfolio specifically optimized for income generation while still protecting against recession and financial repression, targeting a portfolio yield in the 3.5%–5% range.
Gauss Security Holdings
The above ChatGPT portfolio provides a good example of a diversified portfolio as we face the likely scenario of a market correction or possible recession over the next six to 12 months. There are a few adjustments I would make to the above asset allocation recommendation. To tilt toward conservatism I am not inclined to hold both VTI and VOO under the current market conditions. The Buffett Indicator is far too overvalue at this point. While one might include both among the potential asset classes, the other option is to hold a minimum number of shares in these two ETFs.
The following ETFs held in the Gauss portfolio provide an excellent alternative to the above ChatGPT suggestions. Readers should take a serious look at both possible asset allocation suggestions. I made a few adjustments with a few more to come. I will be selling SHV and moving that money over to SCHO in order to cut down on expenses. In addition to SGOL I will add gold ETFs of IAU and GLDM for a total of 10% of the portfolio.
The plan is to sell shares of SHV after the June dividends are paid.
Gauss Rebalancing Recommendations
With the market hovering around an all-time high I plan to hold most of the money in SCHO and wait for a better buying opportunity. The following table shows how the shares will eventually look once the portfolio is rebalanced. For now that can wait.
Gauss Performance Data
Since 12/31/2021 the Gauss has outperformed the AOR benchmark by a wide margin. This gap should widen if and when we have a market correction. However, the portfolio continues to lag the broad market (SPY).
Gauss Risk Ratios
All risk ratios are higher than they were a year ago with exception of the critical Information Ratio. The most important of the four is the Jensen Alpha and it continues to show a slight positive slope. Overall, the Gauss is performing very well.
Lee Cash sent me this excellent article on Financial Repression. Check it out.
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