Crazy Allocations

James McIntosh wrote How To Invest When The Global Crises Never Stop. Catchy title, I'm in. 

Here's the premise;

More war. More political conflict. More weather disasters. The future looks grim, and for investors there’s worse: The standard ways to protect against such shocks might not work.

Many of the comments just tore into him over this, especially the part about the weather, there's a little more about weather further on in the article. He notes that bonds haven't been working because of shocks that are either causing price inflation or threaten to cause price inflation. I've talked about bonds not working ad nauseum for years so I won't relitigate that one other than this quote which is almost identical to what we've been talking about, "plenty of investors agree that bond yields need to be a lot higher than they were to compensate both for the newfound volatility of inflation."

There is also an acknowledgement that gold hasn't been working as a defensive or hedge since the war started. This is exactly when gold should be working; whatever is going on with the Iran War plus the concerns about inflation, gold should be working. Maybe we can find an explanation for why gold isn't working but whether we can or not, it won't change the reality, it's not helping. It is a perfect microcosm for why you diversify your diversifiers. After only a few months, maybe a 25% weighting in gold wouldn't be too painful, the Permanent Portfolio Mutual Fund (PRPFX) is only down 3% in the last three month. If this extends for a while though, a huge weight to gold looks like an unforced error.

“If you just need to buy and hold something for the next decade I think you just have to accept that it’s going to be a bumpier ride than in the past.” 

That's an interesting point. The hold for the next decade is not anything new for my approach, I have quite a few client holdings that have been in there for more than 20 years but preparing for a bumpier ride is probably something more people should do. A lot of our study focuses on how to build and prepare for a bumpier ride in case the scenario the WSJ is framing actually happens. 

Hopefully the writing here is clear that when you diversify your diversifiers you increase the odds of having something or a few things that are working when something like gold is not. There's a quick mention of hedge funds in the context of being diversifiers in the article. It's a vague term but things like managed futures, various forms of arbitrage and systematic macro that we talk about here are hedge fund-like to be sure and are easily accessible through ETFs and mutual funds. That shouldn't be taken as short cut to learning what these funds actually do, but many of them do function as differentiators, as legitimate diversifiers. 

We play around with all sorts of crazy allocations here. The following "Crazy Mix" has no plain vanilla equity or bond exposure.

For all the worry expressed in the article, of course equities might do great. Someone not wanting or needing a "normal" allocation to equities might build out with more alternatives but for people who need something close to "normal" equity exposure, if they try instead to build a portfolio just with alts, I think their portfolio needs to work much harder to get close to plain-vanilla equities' return. A lot more needs to go right for the funds in the "Crazy Mix" portfolio to keep up with plain vanilla. 

This is a different way of articulating the point we regularly make about not getting too far away from equities if you need equity market growth for your numbers to work. 

Here's one comment from the article;

50% Stocks / 50% Bonds / I can’t think of anything else

A 50/50 mix is valid and can get the job done but you can't think of anything else? I am guessing this guessing this guy is his own advisor. Guy, take a little time to learn about some other things. If nothing else, it might embolden your beliefs but can't think of anything else? Yikes.

Another reader had thoughts about equities and TIPS with allocation percentages depending on the age of the investor and suggested a couple of ETFs. If TIPS appeal to you, go for it but I would strongly suggest individual issues not ETFs.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.