When Taleb meets PP

[k9]

I've seen a few topics about Taleb's portfolio on this forum, but not that much. I actually think his ideas can really meet Harry Browne's.

Taleb advises, to avoid extreme events that can destroy a traditional stock-heavy portfolio, to hold almost only "ultra-safe" assets (mainly t-bills and pure cash) that won't yield much but will resist any market event and only 5 to 20% of ultra speculative assets (for example, options) that will behave badly almost every year but will give you a great return on some rare good years. It's called a barbell strategy, as you don't hold semi-risky assets (MT, LT or corporate bonds, blue chips stocks, real estate). The "raison d'être" of this BP (barbell portfolio) is the same as the PP : give about the same return as traditional portfolios, but with much less potential drawdowns on bear markets. In the BP you cannot lose more than 5 to 20% (depending on your risky allocation), while the positive returns are virtually unlimited.

Well, the BP has a few problems. First, it holds a lot of a given asset, cash here. Even if cash is said risk free, we know it can be wiped out by hyperinflation and its real return will often be a little negative if real interest rates are low. Next, it implies you will have almost every year, say, a -5% return and, a few times every 5-10 years, a +100% return that will offset all your losses and give you a generous overall return for the decade. But losing a few percents almost every year, including during some bull market when everybody wins a lot of money, needs, I guess, very strong nerves. Most of us will fail to follow this strategy. And what if you have to wait 20 years before having those amazing returns ? In a context of negative real rates, the portfolio would have actually lost most of its value.

But, hey, ultra-safe assets, as-speculative-as-you-wish assets. That reminds me of the PP + VP ! Why not make a BP with a PP as its safe-assets base ? After all, the PP is a cash-like asset on steroids (low volatility, good returns). You would have the best of both worlds : PP as a strong base for the money you can't afford to lose, and a 10% VP that will be as speculative as possible to let the overall portfolio go on the moon on very good news.

Of course, you can't take money from the PP to put it in the VP, so if your VP goes to 0, well, you can only refill it with fresh new savings, if any, but a positive big growth of the VP will make you inject definitively most of that money into the PP (one way rebalancing).

That would be :
- 22.5% cash
- 22.5% TLT
- 22.5% stocks
- 22.5% gold
- 10% speculative bets (options, micro-caps, ...) that can only be rebalanced one way.

What do you think of that ?

[LifestyleFreedom]

Why not make a BP with a PP as its safe-assets base?

That's the idea.  Good investment plans focus on risk management first (in other words, "rule #1 is don't lose money and rule #2 is never forget rule #1").  There are a variety of opinions on what constitutes a safe-assets base.  Nassim Taleb has his opinion, Harry Browne has his opinion, Benjamin Graham has his opinion, and forth.  Each of these investment thought leaders is successful.

In my opinion, the best way to handle a black swan event is to have a SWAN portfolio (SWAN = sleep well at night).  I'm not sure what the best way is to build a safe-assets base, so I diversify my approaches.  Some of my investments are in the HBPP, some are in proven dividend growth companies, some are in actively managed accounts, and some will be in other approaches that are currently on my drawing board.

[clacy]

You could also merge these two strategies somewhat by doing something like this:

20% DEF  (defensive equity etf, with far less volatility than say VTI)
20% IEF  (less volatility than LTT)
20% LTPZ  (long term TIPS index used in lieu of gold for inflation protection, much less volatile)
20% SHY

That is your low vol version of the PP that is your base.

Then you still have 20% to speculate in options, leveraged ETF's, stock picking, investments in businesses, penny stocks, etc.

[MediumTex]

Taleb has made a career out of making simple things sound hard, while Browne made a career out of doing the opposite.

It's a shame that Browne isn't still around because I think that Taleb could probably find useful employment shining his shoes.