Ditching Asset Allocation Labels

Once you understand the basics of stocks/bond/cash, their strengths and weaknesses, I think the next step is to think about going beyond those three labels and making allocation decisions in terms of attributes.

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1. Equity Beta

OK, I'm cheating with this one but the stock market is the thing that goes up the most, most of the time and most consistently with a volatility profile we understand (see below about crypto). The stock market has an up year 72% of the time. Instead of fighting that, benefit from that ergodicity.

2. Optionality

Primarily, I'm talking about cash. There's multiple ways to think about the optionality that cash offers. From a strictly investing standpoint, it's the optionality to buy after a large decline, this would be opportunistic. As you get closer to retiring or some other event where you might need to access your money, cash becomes a way to avoid sequence of return risk; the risk of a large decline shortly before or shortly after you need to start pulling money out. Optionality could also refer to something like an inverse index fund that would go up a lot if the stock market went down a lot, you'd be able to avoid selling low.

3. Asymmetry

Here's where I think crypto can fit. It could go to a bazillion or to zero. A small investment could result in a lifechanging piece of money or go to zero. I've seen others ascribe this attribute to uranium companies, small biotechs and other speculative bets. Don't start out with more than you can afford see go to zero. If/when one these does grow into a lifechanging piece of money, sell and let it change your life.

4. Inflation

I've been concerned about price inflation for a while, never knowing when it might be a problem. Here I would include gold, short dated TIPS, other commodities, materials companies that focus on commodities. Some will include REITs in this discussion but my experience is that they correlate with stocks when stocks go down. Ditto pipelines.

5. Volatility Mitigation

I'm a big fan of using tools, specialized funds mostly, to manage portfolio volatility. This can include holdings with a low or negative correlation to equities, absolute return, inverse funds among others. Finding these takes work and time but they're out there. Too much though and you'll lose the benefit of the stock market's ergodicity.

6. I don't have a good alternative name for fixed income

For years I have avoided, or at least minimized exposure to interest rate risk. Rates were crazy low for years which means prices have been high. Buying high is riskier than buying low. There are income sectors that allow you to mostly avoid interest rate risk and one or two that should actually benefit from rates going up.

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