Investment Portfolios: Diversification Strategies

(filmed Feb 7, 2020)

Summary of Counter-correlation Strategies:

Chris Cole of Artimis Capital (the person being interviewed)  argues that most investors and pension funds are historically illiterate and use portfolios based on models of the last 40-years of market data, rather than longer-term market conditions going back to the 1920s.

Investment Eras:

  • Secular Decline (1929-1946)
  • Secular Rebirth (1947-1963)
  • Secular Stagnation (1964-1983)
  • Secular Boom (1984-2007)

Most people would be surprised to learn that most of the stock market growth of a 60/40 fund in the last 90 years occurred in the 1983-2007 era of Secular Boom.

90% of the returns of a 60-40 stock-bond portfolio came from the 22 years between ’84 and 2007.
Just 22 years drove 90% of the gains of that portfolio over 90 years.

The Limits of “Traditional” Portfolios:

Cole argues that approaches we think of as “traditional” have done well in the recent Secular Boom, but would not have done as well in other market environments:

  • 60/40 stock/bond fund: bonds don’t counterbalance a portfolio as well under zero interest rates.
  • “buy the dip”: would have gone bankrupt 3 times in the past 90 years

Proposals for Other Market Conditions.

In bear-markets, one doesn’t know whether to expect inflation or deflation, so Cole advises that investors carry exposure to each possibility.

Although Cole is selling a proprietary asset class he calls “Long Volatility” (beware of how Cole is making his money), one does not to purchase his services to learn from his thesis.

Three of the 4 asset classes can be purchased through generic mutual funds or ETFs:

  1. TIPS (Treasury Inflation protected securities)
  2. Commodities – bought through an ETF
  3. Gold –  bought through an ETF or other arrangement
  4. Long Volatility – (available to sophisticated investors) ** disregard

What is your attitude to these first three asset types as a complement to traditional stocks and bonds?

An asset class doesn’t have to generate a long-term appreciation to be beneficial if it is negatively or less-correlated with other assets.  In fact, the example Cole uses actually loses money overall individually but is beneficial in counter-balancing the portfolio.

  1. TIPS have some upside under inflation but do not risk the same losses as stocks.
  2. Commodities Index: have the potential to hedge against inflation of commodities covered by the index
  3. Gold: My Dad doesn’t see any place for Gold other than jewelry.  I note that gold is (historically) less correlated with stocks and could reduce the overall volatility of a portfolio.
    • Faith in the stability of the fiat US Dollar: It was only in 1971 (7 years before I was born) that the US went off the gold standard and if you look worldwide support for gold as a monetary hedge is greater in places that have had the most government malfeasance and economic turmoil. From what I’ve heard, disdain for gold as a financial hedge is only common in places like Western Europe, the US, and Canada, which have had better governance (historically).  The quality of US governance is shows signs of deterioration, making confidence in the government’s fiscal restraint less certain.


In Cole’s paper — The Allegory of the Hawk and Serpent — he describes the different investment eras since the 1929 stock market crash:

Investment returns were heavily influenced by what era the investor was in:

Beginning in the early 1980s, a self-reinforcing serpent of favorable demographics (the baby boomers) and declining interest rates (falling from 19% in 1981 to nearly 0% today) drove asset prices higher and higher.

Baby boomers saving for retirement meant more money flowed into stocks, bonds, and real estate, driving up prices. At the same time, interest rates were decreasing, causing individuals and companies to take on more debt, some of which were used to buy those same assets, further increasing prices.

Today, the situation looks quite different. The first wave of boomers began retiring in 2017. Over the next decade, more boomers will sell their serpent assets (stocks, bonds and real estate) to fund their retirement. On the interest rate side, it’s anyone’s guess where rates will go from here. We do know that they are at historic lows already.

Growth Assets:

Serpent assets include those assets which perform well in periods of growth such as

  1. stocks,
  2. bonds and
  3. real estate.

As these periods go on, they can become corrupted by greed as either fiat devaluation and/or debt expansion replace fundamentals. If left unchecked, this is ouroboros, where the serpent of growth eventually devours its own tail.

Stagnation/Depression Assets:

Hawk assets are those which do well in periods of decline or stagnation:

  1. gold,
  2. long volatility/tail risk, and  (Chris Cole is selling a strategy for this to more sophisticated investors)
  3. commodity trend following.

Diversified Portfolios:

A number of portfolios attempt to implement diversity between assets in a way that can better weather a variety of market conditions:

1.  All-Weather (Ray Dalio: founder of Bridgewater hedge fund)

2. Golden Butterfly

3. Paul Merriman’s Vanguard

Fund Symbol Aggressive Moderate Conservative
Vanguard 500 Index Admiral Shares VFIAX 11% 6% 4%
Vanguard Value Index Admiral Shares VVIAX 11% 7% 5%
Vanguard Tax-Managed Small-Cap Admiral Shares VTMSX 11% 7% 4%
Vanguard Small-Cap Value Index Admiral Share VSIAX 12% 7% 5%
Vanguard Real Estate Index Admiral VGSLX 5% 3% 2%
Vanguard Developed Markets Index Admiral Shares VTMGX 9% 6% 3%
Vanguard International Value VTRIX 18% 10% 7%
Vanguard FTSE All-World ex-US Small-Cap Index Admiral VFSAX 9% 5% 4%
Vanguard Emerging Mkts Stock Index Admiral Shares VEMAX 9% 6% 4%
Vanguard Global Ex-US Real Estate Index Admiral Shares VGRLX 5% 3% 2%
Short-Term Government Bond Index Admiral Shares VSBSX 0% 12% 18%
Intermediate-Term Government Bond Index Admiral Shares VSIGX 0% 20% 30%
Short-Term Inflation-Protected Securities Index Admiral Shares VTAPX 0% 8% 12%


4. The Dragon Portfolio   (Chris Cole’s Sample portfolio)

According to Artemis’s research, the optimal portfolio from 1929 to 2019 was:

  • Domestic Equity (24%)
  • Fixed Income/Bonds (18%)
  • Active Long Volatility (21%)  (Chris Cole’s paid fund)
  • Commodity Trend Following (18%)
  • Physical Gold (19%).

The “Dragon” shares the commodity and gold asset classes and adds a “volatility” asset class.

Active Long Volatility: Sophisticated Investors

Implementing the “Active Long Volatility” is more difficult than other asset classes and likely is only possible for sophisticated high-net-worth investors.

Vanguard Dragon Proposal

There is a conversation on the (Vanguard) Bobble Heads forum the proposes the following instead:

Market-Timing & Portfolio Reallocation

Buying into the type of counter-cyclical assets may risk buying at market highs.
Commodities do not appear to at quite the same highs as Gold.