A Multi-Asset Solution
An alternative portfolio construction strategy
INTRO
Here is one example of a multi-asset allocation solution. We have no idea of your specific situation, and generalizations can be tricky…and dangerous. But the concept is sound – more diversification for better risk adjusted returns. Pay extra attention to the risks and liquidity inside each asset class, as a higher vol environment will magnify both (risks & liquidity).
ASSET ALLOCATION
We believe the asset allocation decision dwarfs the stock selection decision. Yet, most are talking about and looking for the next 10-bagger: a stock that goes up 10x. Very little time is spent discussing the proper allocation towards stocks inside one’s portfolio.
To put this in context – the average single stock position inside any given (prudent) portfolio is ~2%. Yet, if we went around the room and asked people what they think is a fair TOTAL stock allocation inside a portfolio, the numbers will range from 20-80%. So now we are comparing a single stock decision of 2% with an asset allocation decision that can be off by 10, 20, or 50+%!
BAR BELL APPROACH
The entire market can be viewed as one big tug-o-war between inflation and deflation. The market wanted to deflate (go lower) in 2008…and it did. The only way to stem the slide was for the Fed and the Central Banks to step in and offer liquidity injections (inflation – the printing of money).
Ever since 2008, Central Banks around the world have been *aggressively* inflating in order to keep the market/economy moving forward in an orderly fashion. We never know which outcome will win out – extreme inflation or deflation, therefore we need a portfolio that can protect us from either outcome.
THE PUNCHLINE
20% STOCKS / 20% BONDS / 20% PRECIOUS METALS (AND BITCOIN) / 20% HARD ASSETS / 20% CASH
The model above is an example structure that facilitates an improved portfolio model for investors. Below, we have listed out considerations for constructing each of these investment ‘buckets’.
STOCKS
INITIAL DECISION: play the stock selection game or choose an index fund/ETF.
ADDITIONAL CONSIDERATIONS: privates, qualified plans, and restricted stock – they are all very different and factor into the mix.
C&P BENCHMARK: SPY 0.00%↑
BONDS
RATES RATES & RATES: first lesson on Wall Street – “learn your rates, as they are at the center of all”.
FINALLY A REAL YIELD: for the first time in a while we can get a decent fixed income return.
THE SPECTRUM: from treasuries to distressed debt – find your comfort zone.
C&P BENCHMARK: AGG 0.00%↑
PRECIOUS METALS & BITCOIN
FIAT HEDGES: an insurance against a potential currency crisis.
THE SPECTRUM: gold and gold stocks are at opposite sides of the risk spectrum. Know your goals…and risks.
BITCOIN: not a bitcoin maximalist (nor a gold bug), but it is easy to rationalize at least a 1% allocation.
OTB (Outside The Box): storage and insurance are a thing.
C&P BENCHMARK: GLD 0.00%↑
HARD ASSETS
PRIMARY WEALTH: learn the importance of primary and secondary wealth.
WIDE SPECTRUM: from commodities to real estate, to art, and more. Lots fall into this group.
LIQUIDITY & VOLATILITY: both take on a new meaning within this asset class.
OTB CONCEPT: supplies are hard assets.
C&P BENCHMARK: Dow Jones Commodity Index
CASH
FINALLY GETTING PAID: we can now get paid for holding cash.
TOO MUCH: many view 20% as too high.
TWO SOLUTIONS: 1. Cash allows for flexibility, which is valuable in a volatile market. 2. A hedge against deflation.
C&P BENCHMARK: Federal Funds Rate
PATH FORWARD
KNOW YOUR FEES: the one thing you can control.
HAVE A PLAN: we have allocation decisions to make inside each bucket. There is no reason to rush and make a 10%, 20% or even a 5% bet on any given day. We can spread out 2% bites over some course of time to manage the volatility and implementation risk. Plan the trade and trade the plan.
SHOPPING LISTS: build your lists to stay ahead of the volatility. Make volatility your friend.
YOUR OWN EDUCATION: there is no right answer, and the best investment you can make is in your own education.
Disclaimer: The information contained in this article is for informational purposes only and should not be considered as investment advice. The information presented in this article should not be interpreted as a recommendation to buy, sell or hold any security or investment. Before making any investment decisions, it is important to do your own research and seek advice from a qualified professional. Investing in securities and other financial instruments carries a high level of risk and may not be suitable for all investors.