Build a portfolio that can withstand uncertainty

“True security does not rely on predicting the future, but on designing a structure that can survive regardless of what the future holds.” — “Safe Haven: Investing for Financial Storms”

Excessive risk aversion and excessive risk-taking can both harm long-term wealth accumulation. The key is to find a moderate balance.

A well-known hedge fund manager discussed in his writings how to build a portfolio that can protect principal during extreme events.

We are in turbulent times

The current global situation is complex and changeable: stock markets are repeatedly hitting new highs, but long-term bond yields remain high; the dollar is strengthening, yet consumption is weak; the AI boom is in full swing, but the world faces fragmentation and war risks. Geopolitical tensions are high, and conflicts are ongoing in various regions.

Core Principle of Financial Management in Turbulent Times: It is not about seeking the highest returns, but ensuring the ability to withstand losses.

The investment philosophy of this fund manager is unique. He focuses on designing a portfolio that can survive “black swan events.”

He pointed out a harsh reality: what truly determines the fate of wealth is not the average rate of return, but the ability to avoid complete loss. Even if one achieves a 15% return year after year, encountering a single extreme event of -80% could make it difficult for the portfolio to recover.

The focus is not on holding a single safe-haven asset, but on building an overall structure that can survive the storm. Compound growth is often not interrupted during normal times but collapses during disasters.

Five Key Principles of Hedging Investments

1. Safe assets are not equivalent to low-volatility assets. A true safe-haven asset should be able to achieve reverse growth during a systemic collapse.

2. In a black swan event, the power of compound interest can backfire on investors. After a significant drop, a larger increase is needed to break even.

3. Do not try to predict the future, but prepare for the worst-case scenario. Predictions are often an illusion, while preparation is an effective way to control risk.

4. Pursue a convex yield structure. This means experiencing slight losses or breaking even during normal periods, but achieving exponential growth during extreme events.

5. Geographic and custody diversification is crucial. The location and custody methods of assets can become a matter of life and death.

Suggested Structure for Building a “Hedge Investment Portfolio”

• 90-95% allocated to low-risk, stable compound interest assets, such as short-term bonds, cash, high-dividend stocks, etc.

• Allocate 5-10% to high-leverage “tail risk hedging” assets, such as long volatility indices, deep out-of-the-money put options, gold/bitcoin, etc.

This structure performs modestly during normal times, but can achieve explosive growth during black swan events.

Multi-layered Asset Allocation Suggestions for Turbulent Times

Level 0: Maintain physical health and cultivate diverse survival skills

Layer 1: Self-custodial anti-systemic risk asset ( -5% )

• Physical Gold
• Bitcoin ( cold wallet storage )
• Overseas Assets/Passport

Layer 2: High leverage tail risk hedging asset ( -3% )

• Deep Put Option
• Volatility Index Bullish
• Gold Call Options

Layer 3: Liquidity and Growth Assets ( 70-80% )

• Short-term Bond ETF/Money Market Fund
• Global High Dividend Stocks
• Emerging market real estate and REIT

Conclusion

We cannot prevent disasters from happening, but we can ensure that we do not completely go to zero under any circumstances through reasonable asset allocation. Building a portfolio that can withstand uncertainty is the wise choice to cope with future risks.