Chris Cole: Constructing A Portfolio That Will Last 100 Years

In his recent interview on The Mab Faber Podcast, Chris Cole discusses constructing a portfolio that will last one hundred years. Here’s an excerpt from the interview:

So, what we said is, when constructing a portfolio to last 100 years, what you want to do is you want to diversify based on how assets perform in different market regimes. And those market regimes are incredibly important. If we look at what that means, well, look at certain strategies that perform in secular growth cycles. That’s the experience we’ve had the last 40 years.

Now, that’s things like stocks, private equity, all the typical asset classes, you know, value stocks, everything else. Then, you want to look at strategies that perform in periods of secular stagflation. So, what performs in a period of depression, like a deflationary crisis? Well, strategies like long volatility actually performed very well. If you look at something like the 1930s, volatility realized over 40 for a decade. That’s absolutely incredible.

So, in that sense, some long vol strategies would have carried extremely well and saved your portfolio. Now, fixed income does very well in deflation, if you’re starting at an already high-interest rate point. We saw this in the 1930s, rates came very down close to zero and the efficacy of fixed income as a defensive product becomes problematic. You can go to negative rates, but the likelihood of going to negative 3%, in a deflationary crisis is very difficult.

I mean, you consider that convexity or that non-linearity you get, bond yields go down, bond prices go up and they go up in a nonlinear fashion. That’s been the basis. When your rates are already at zero, you can’t rely on bonds in that deflationary environment. What performs in a stagflationary bond like the 1970s. Well, that’s when you want to be in things like commodity or trend-following, momentum trend following strategies, particularly in raw commodities. Well, when you put all this together, we found that actually a portfolio of five core asset classes, what we call market regime diversifiers because they’re not assets, they’re regime diversifiers, is a portfolio that lasts for 100 years and performs consistently through every market cycle.

And this portfolio, not only performed in every single market cycle but also was able to do so with about 1/5 to 1/6 the drawdown of a 60/40 portfolio and a risk parity. That’s comprised of really five core diversifiers. Assets like equity that performed during secular growth, equity-linked assets like that. And that could include real estate and private equity, anything that’s long GDP based.

The second asset class is, of course, fixed income. The third asset class is what we call fiat alternatives. And that’s mostly precious metals, and gold. You could actually, although, we can’t backtest this, you could actually maybe include a little bit of crypto in there. The fourth asset class is long volatility and conducts hedging. And the fifth asset class is trend following commodities and CTAs.

When you put all of those asset classes together in one commingle portfolio, whether you’re dealing with secular growth, whether you’re dealing with stagflation, whether you’re dealing with deflation, your portfolio consistently performs. And the rebalancing of all these different asset classes, they diversify based on market regime. That’s the key. Diversification by market regime is what creates a steady growth cycle. This is, I think, incredibly important.

You can watch the entire interview here: