"Where should I invest?"

Minimize the risk of having too much exposure to a single government by diversifying your assets, businesses and lifestyle to various jurisdictions.

"Where should I invest?"

Two days ago we reviewed different investment philosophies. The 100% cash portfolio highlighted the considerable carry we can get from cash, the 100% stock portfolio reminded us that it is important to maintain a high level of risk, and the risk parity portfolio pointed out the benefits of bond-equity diversification.

Then yesterday we made a list of the key candidate components in our portfolio: cash, treasuries, value and momentum stocks, crypto, commodities and real estate.

Today we bring it all together. Our guiding principles will be: (1) be ready for a mid-cycle slowdown, (2) maintain carry, (3) maintain equity upside, because the market could continue to rally, (4) keep some dry powder to buy markets lower.

Step 1, we will divide our allocation in 2 buckets, risky assets and safe assets, and use the traditional 60-40 split. We can certainly be more sophisticated than that, but this is ok for now.

40% Risky Assets

60% Safe Assets

Step 2, we allocate to our safe assets. We probably want to keep 20% of our portfolio in cash to see if we can buy equities a bit lower than 20 P/E. The rest can go to Treasuries.

• 40% 10y US Treasury, 4.1% yield

• 20% Cash, 5.4% carry

Step 3, we allocate to our risky assets. Our standard play could be a half-half split between momentum and value, but we want to make space for real estate and oil. Given the extraordinary momentum of the Magnificent Seven, we don’t want to limit them too much as value still needs to demonstrate it works.

• 20% Magnificent Seven, 0.1% dividend yield

• 10% Value Stocks, 3-4% dividend yield

• 5% Oil, 8% carry

•  5% Crypto, 3.3% carry

In conclusion, 

40% Risky Assets

•  20% Magnificent Seven

•  5% Value Stocks

•  5% Real estate

•  5% Oil

•  5% Crypto

60% Safe Assets

• 40% 10y US Treasury

• 20% Cash

If the market rises, our risky assets will go up and our safe assets will give us 4.5% carry. If the market falls, the appreciation in our safe assets will make up for our largest losses and allow us to tilt back into risk assets at lower valuations. Or at least, that’s the theory.

In practice, professionals will use past history and monte carlo simulations to assess the max drawdown you will likely experience - and tune your portfolio accordingly. But the result won’t be massively different from what you see above.

"Where should I invest?"

Yesterday we discussed 6 “paragon” portfolios, including extremes across the risk spectrum like being 100% in cash or 100% in stocks.

Today, we list 7 building blocks for your portfolio, with strong tailwinds at their back in this market phase. This is in preparation for part 3 tomorrow, where we’ll assemble them into a model portfolio for Q4’23 and onwards.

Cash offers mouth-watering interest. With a remarkable 5.4% yield, cash is all of a sudden fashionable. We keep cash in our allocations as dry powder, to buy something later at lower valuations. 

This is the right moment for Treasuries. Mid-cycle is a good moment to load on Treasuries, especially when the Central Bank stops hiking.

Play the AI revolution with the ‘Magnificent Seven’ stocks. 7 stocks have led the market higher in the last 12 months: Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla. One might be wary of buying stocks at the nadir, but momentum can last deep into the mid-cycle - especially at the onset of new technology.

The market is full of Value stocks. Do you reckon the market is expensive? Think again! Rock-bottom bargains abound, from ALB to EMN to VZ the market is full of forlorn stocks with value levels last seen in 2008.

Oil is rich in carry and momentum. How would you like 8% carry and strong tailwinds as trade recovers at the end of the inflationary bout?

Crypto is the bull market nobody talks about. Once upon a time, there was a bull market in crypto and people were enthused by NFTs. Then AI came, and we moved on. But Crypto has not disappeared, and smart contracts will once again come to the fore in the future. Load on those ETHs.

Real estate will benefit from the return to the office. Real estate comes from a brutal battering: higher rates and work-from-home policies were a perfect storm to crash prices lower. But we’re past all that, and REITs of all colors might be getting ready to shine again.

Tomorrow we’ll take these 7 lego blocks and try to assemble them in a coherent portfolio ready for the next phase of the cycle!

"Where should I invest?"

Asset allocation pieces have a grand and long-standing tradition in big banks.

They pop up at the beginning of each quarter and remind us about the most important investment decision we must make: portfolio allocation.

So here’s 6 profiles of portfolio allocation - each one with its own merits:

Cash is king: 100% in cash. T-Bills give you 5.4% yield. With inflation falling fast, that’s not a bad place to be.

Treasury Bug: 100% in 10Y Treasuries. The end of the hiking cycle is in sight AND it’s entirely possible we see rate cuts next year. Long bonds do well in this scenario, and give you 4% carry in the meantime. Treasury bugs will hold on to their USTs until they can buy the market at a much cheaper P/E.

Risk Parity: [60% in Treasuries] + [40% in your favourite stocks]. Risk Parity’s century-old track record is stellar, and long-term investors do well to trust it with their savings. In terms of what stocks to add, we’ll discuss it tomorrow but the whole market is your menu, from strong momentum in tech to deep value in other sectors.

To the Moon: [30% cash] + [70% of your favourite stocks]. Who said the bull market is over? Cassandras have been complaining about expensive stocks for months and yet here we are at SPX 4,500. Just keep some cash to buy the dips.

Going Nova: [80% in your favourite stocks] + [20% in crypto]. The way to long-term returns is long-term risk-taking. “No pain, no gain”, that’s the philosophy. You got to keep the pedal to the metal all.the.time. if you want oversized returns. 

The ‘Warren Buffet’: 200% in your low beta stocks. Buffet is not a value investor, he’s a low beta investor. He buys low-vol stocks on leverage, trusting the best US companies not to go bust. Worked well for him for a long time.