"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.