Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

The Hundred Year Portfolio?

By Boris SchlossbergMarket OverviewMay 07, 2021 07:13AM ET
www.investing.com/analysis/the-hundred-year-portfolio-200578351
The Hundred Year Portfolio?
By Boris Schlossberg   |  May 07, 2021 07:13AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Artemis Dragon Portfolio
Artemis Dragon Portfolio

  • Diversifying by market regime rather than asset class
  • The “Moneyball of Money” approach
  • Challenges for the DIY investor

In part one of our analysis of Chris Cole’s appearance on the Odd Lots podcast we took a look at the danger of the recency bias and the over reliance of investors on the 60/40 portfolio which has performed tremendously for more than a generation, but may now move into a massive multi-year path of underperformance due to a variety of factors including demographics, interest rates and de-globalization.

Diversifying by market regime rather than asset class

In this part we consider Mr. Cole alternative portfolio – an investment thesis that he calls the portfolio for 100 years – that is constructed quite differently from the traditional 60/40 stock/bond mix. Before we examine the specifics, it’s important to note that Mr. Cole central tenet is that investors should diversify across market regimes rather than asset classes. This is a very innovative idea as it addresses one of the key problems of diversification by asset – namely that in certain market regimes correlation moves to 1.0 providing no actual protection to the investor as many assets move in the same direction. This can certainly happen with a simple bonds and stock portfolio as there have been many periods in history when both stock and bonds fell at the same time, most recently during the pandemic crash of 2020. Indeed, one could make an argument that the massive gains of the 60/40 portfolio over the past 40 years are due simply to the incredibly long positive correlation cycle between bonds and stocks.

Mr. Cole highlights the dangers of projecting the past onto the future and suggests that investors need to be prepared for three distinct market regimes – deflationary crash, fiat devalue and growth  and reflation. Typically during deflationary crashes cash, hard assets and long volatility strategies work best. Few investors realize that during the 1930’s realized volatility was 40% per year. It is as though the massively volatile year of 2008 repeated itself for a decade.  Fiat devalue and growth such as we have now, favor equities and trend and momentum strategies. Finally, the reflation regime favors fiat alternatives, commodity-trend and equity assets. 

The “Moneyball of Money” approach

Mr. Cole’s portfolio construction consists of dividing the assets into approximately five equal buckets of allocation. These are interest rate linked assets (bonds, high dividend stocks etc.), secular growth assets (large cap and small cap stocks), fiat alternatives (precious metals and crypto), trend and momentum strategies (typically done by commodity pool operators) and long volatility. His argument is that investors should essentially create a “moneyball for money” approach where no one asset is superior but the sum of the parts is greater than the whole. Just as in baseball and soccer, teams have discovered that a combination of slightly better than average players can outperform an opponent with one big superstar. Mr. Cole’s contention is that a similar approach where no one asset will dominate performance in the long run is a much better approach to wealth building. 

Challenges for the DIY investor

Recent history has certainly borne him out as 2020 which saw the presence of all three market regimes created a perfect laboratory test for Mr. Cole’s thesis which in turn generated a 50% return for his Dragon portfolio versus only a 15% gain for the 60/40 mix. There is however a big problem with Mr. Cole’s approach as he is the first to admit. It does not lend itself to a simple do-it-yourself construction like the traditional 60/40 portfolio which can be replicated with nothing more than a SPY and TLT ETF purchases. Investors could certainly add the fiat alternative component by buying the GLD ETF and adding bitcoin to the mix but its the trend momentum strategies and long volatility strategies that are hard to replicate because there are no good ETF and ETN products that can mimic these approaches. All of the ETF or ETN products that attempt to replicate these strategies rely on derivatives such as futures and options and inevitably lose net asset value to the cost of carry embedded in those products. Witness the disastrous performance of the OIL ETF when the futures market went into negative pricing. The slow drip of cost of carry fees in the derivatives markets almost ensures that any ETF or ETN in the volatility or trend space will lose money. That’s why Mr. Cole recommends professional money management of the portfolio as the only true way to achieve its results.

Still despite the practical obstacles to its construction, investors should still consider Mr. Cole’s ideas. At very least they could easily implement three out of five recommendations, but even on the matter of long volatility investors could consider a simple straddle strategy on the S&P 500 and on the idea of trend momentum they could try to implement a simple 200 day moving average strategy on the CRB index ETFs. Granted these far from perfect proxies but they would comply with the spirit of Mr. Cole’s thesis that robust performance depends on the preparation for every possible market regime.  

The Hundred Year Portfolio?
 

Related Articles

The Hundred Year Portfolio?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email