The World’s Simplest Investment Portfolio recommended dumping everything into $AVMA ( ▼ 0.34% ), forgetting about it, and going out and living your life.
But you’re still here. You’re still reading this, probably hoping for a bit of insight that leads you to something slightly better than average. So thank you for believing in me?
What I will propose, and what represents the starting blocks for my non-retirement portfolio, is something that’s a little less aggressive than $AVMA ( ▼ 0.34% ), a little more diversified, and is designed to have a smoother ride.
It’s nothing magical - it just incorporates a bit of alts and ends up looking like this:
30% Alts - equally weighted among two trend-following alts and two long-short factor alts.
5% Cash
Why these?
$AVGE ( ▼ 0.59% ): global diversification with a slight value/quality tilt (because that’s just who I am). And if AI ends up owning the world, assuming it doesn’t kill me, then at least I’ll own a little bit of it.
$BNDW ( ▼ 0.01% ): one of the more interesting things to do with an LLM is to drop your portfolio allocation into it and ask it how to improve it to optimize its Sortino ratio. Most LLMs tell me that I should add long-duration treasuries to my portfolio. Historically, that has been the right answer. But with high debt levels, still relatively modest Treasury yields, and the lack of serious people in charge of fiscal and monetary policy, I’m not sure yields will be the flight to safety they once were. In fact, they might be the cause of the next sell-off in all assets. So I’m hedging my bets and using global bonds. Sure, a lot of other countries are heavily indebted with negative population trends, and $BNDW ( ▼ 0.01% ) still has a ton of US government debt in it, but I still think its inherent volatility will be substantially less than my basket of stocks.
Alts: this is where the improvement in performance comes in. I’m not going to say which specific alts I have because it behooves you to do the work to understand what you’re buying when you sign up for one of these. I will give you a few pieces of advice:
Make sure it has been around for more than a decade.
Make sure its return over that decade approximates bonds or better.
Eyeball its historical chart and make sure it generally zigs when either equities or bonds zag. Otherwise there’s no point in holding something that introduces complexity if it’s correlated to your other positions.
Cash: this basically acts as my emergency fund. I also use it to settle short trades that go against me (more on that in the future).
The Past vs the Future
The addition of alts to a portfolio is based on them either historically providing crisis-alpha or simply being a source of non-correlated returns.
Historically, mid- to long-dated Treasury bonds were the best non-correlated asset for an equity portfolio.
Historically, alts boosted a portfolio’s Sortino ratio even further alongside Treasury bonds.
But you make money dealing with the future, not just modeling the past. I think we’re in an environment where the value of US treasuries to a robust portfolio will be more limited, or at least more inconsistent. Which is why I have more alts than fixed income these days.