Instead of simply owning different stocks and bonds, a more robust strategy is to hold assets that perform differently under various economic conditions like high risk, instability, or inflation. This involves balancing high-volatility assets with stores of value like gold to protect against an unpredictable future.
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In an economy where currency is being systematically devalued through money printing, holding cash is a losing strategy. The only way to preserve wealth is to own a diverse basket of 12-15 uncorrelated assets (e.g. stocks, commodities, real estate) that are subject to different economic pressures.
In high-inflation environments, stocks and bonds tend to move in the same direction, nullifying the diversification benefit of the classic 60/40 portfolio. This forces investors to seek non-correlated returns in real assets like infrastructure, energy, and commodities.
The 60/40 portfolio is obsolete because bonds, laden with credit risk, no longer offer safety. A resilient modern portfolio requires a broader mix of uncorrelated assets: cash, gold, currencies, commodities like oil and food, and short-term government debt, while actively avoiding corporate credit.
A stock with a negative beta moves opposite to the overall market. Investors intentionally use these assets, such as gold, as a hedge. When the broader market crashes, these investments are expected to rise in value, helping to offset losses elsewhere in a portfolio.
Owning multiple stocks or ETFs does not create a genuinely diversified portfolio. True diversification involves owning assets that react differently to various economic conditions like inflation, recession, and liquidity shifts. This means spreading capital across productive equities, real assets, commodities, hard money like gold, and one's own earning power.
The real benefit of diversification is matching assets with different time horizons (e.g., long-term stocks, short-term bills) to your future spending needs. All asset allocation is ultimately an exercise in managing financial goals across time.
A more robust diversification strategy involves spreading exposure across assets that behave differently under various macroeconomic environments like inflation, deflation, growth, and contraction. This provides better protection against uncertainty than simply mixing asset classes.
Gold is a low-returning asset, similar to cash. Its primary value in a portfolio is not appreciation but diversification. During periods of stagflation or debt crises when other assets like stocks and bonds perform poorly, gold tends to do very well, stabilizing the portfolio.
Arguing against the traditional 60/40 portfolio amidst a market mania, Gundlach advises a radically different allocation. He suggests a maximum of 40% in stocks (mostly non-US), 25% in bonds (with non-dollar exposure), 15% in gold and real assets, and the rest in cash.
According to famed investor Ray Dalio, the single most important investment principle is holding a portfolio of 8 to 12 assets that don't move in tandem. This sophisticated diversification drastically cuts risk by up to 80% without sacrificing returns.
