The Wisdom of Building Defensive Portfolios in Turbulent Times

"True security does not rely on predicting the future, but rather on designing a structure that can survive regardless of what the future holds." This quote comes from the book "Safe Haven: Investing for Financial Storms" and reveals the core principles of investing during uncertain times.

Overly avoiding risk and overly taking risks can both lead to long-term wealth loss. The key is to find a balance and build a portfolio that can protect the principal in extreme events.

We are in a contradictory period: the stock market keeps hitting new highs, but long-term bond yields remain high; the dollar is strengthening, yet consumption is weak; artificial intelligence is sparking capital frenzy, while the world faces fragmentation and war risks. The geopolitical situation is also becoming increasingly tense, with conflicts erupting in various places.

In this environment, the essence of investing is not about earning the highest returns, but about building a portfolio that can withstand shocks. As the book states: "What truly determines your wealth destiny is not the average rate of return, but whether you can avoid a 'zeroing out' moment."

Even if a portfolio achieves a 15% return every year, it will be difficult to recover from an 80% crash. Therefore, the key is not to hold a specific "hedge asset," but to build an overall structure that can survive the storm.

The book proposes five hedging strategies suitable for "extreme times":

1. Safe assets are not the same as low-volatility assets. True safe-haven assets are those that can rise significantly in value during systemic collapses.

2. During a black swan event, the effect of compound interest may backfire on investors. A 50% drop requires a 100% rise to break even, and black swan events often lead to even greater losses.

3. Do not try to predict the future, but prepare for the worst-case scenario. While specific events cannot be predicted, various possible situations can be addressed through asset allocation.

4. Convex yield structures are true hedging tools. These types of assets may incur slight losses during normal times, but can provide multiple returns in extreme events.

5. Geographic diversification and custody diversification are crucial. Do not concentrate all assets in one country or under one custody method.

The recommended portfolio structure by the author is: 90-95% allocated to low-risk, stable return assets, and 5-10% allocated to high-leverage "tail risk hedging" assets. This structure performs mediocrely during normal times but can show astonishing performance during black swan events.

In response to the current risk environment, a possible "layered asset structure" is as follows:

Level 0: Maintain a healthy body and practical skills.

Layer 1: Anti-systemic risk assets ( 5-10% physical gold, 5-10% Bitcoin, 5-10% overseas assets )

Layer 2: Tail risk hedging assets ( 1-2% deep out-of-the-money put options, 1-3% long VIX, 1-2% call options on gold )

Layer 3: Liquidity and Growth Assets ( 20-30% Short-term Bonds, 20-30% Global High Dividend Stocks, 5-10% Emerging Market Real Estate )

The core idea of this book is: although we cannot prevent major crises from occurring, we can ensure that we do not collapse by carefully designing our asset structure. In turbulent times, good defense is often the best offense.