I agree with this wholeheartedly but what I struggle with is the implementation. We’re at the tail end of a debt bubble that has pushed almost all assets to the stratosphere. If there’s such a high correlation between all the bubble assets (stocks, bonds, real estate), it makes really difficult to actually build a diversified portfolio. Do you agree? And if so, how do you approach diversification in an everything bubble world?
Really good question. Obviously there is no way to avoid short term declines if everything goes down and all correlations go to 1. The way I like to approach it is to consider some of the bigger risks, and buy companies that benefit from those outcomes. So own companies that benefit from inflation, as well as companies that benefit from deflation. Own things that might do well if interest rates rise to offset most of the other stuff that will do well if they decline. Look for companies that would benefit from a recession - maybe through consumers trading down, or capturing market share from weaker competitors. It's an imprecise science, of course. A portfolio built this way would have underperformed YTD, but is set up to preserve capital if things reverse.
I agree with this wholeheartedly but what I struggle with is the implementation. We’re at the tail end of a debt bubble that has pushed almost all assets to the stratosphere. If there’s such a high correlation between all the bubble assets (stocks, bonds, real estate), it makes really difficult to actually build a diversified portfolio. Do you agree? And if so, how do you approach diversification in an everything bubble world?
Really good question. Obviously there is no way to avoid short term declines if everything goes down and all correlations go to 1. The way I like to approach it is to consider some of the bigger risks, and buy companies that benefit from those outcomes. So own companies that benefit from inflation, as well as companies that benefit from deflation. Own things that might do well if interest rates rise to offset most of the other stuff that will do well if they decline. Look for companies that would benefit from a recession - maybe through consumers trading down, or capturing market share from weaker competitors. It's an imprecise science, of course. A portfolio built this way would have underperformed YTD, but is set up to preserve capital if things reverse.