An investment framework
Posted: Sat Jun 24, 2017 2:55 pm
I want to discuss an investment framework here I thought about
Here are the axioms of the framework (if you dont agree with those, you probably wont agree with the framework)
1) the future is unpredictable, especially on a macro level (think societies, economies, entire nations)
- we dont have model that can explain the world good enough (on the society level)
- even if we had such a model, it would still be almost impossible to predict the long term future, because of chaos theory (very small changes in the start setting lead to gigantic changes a fear years later)
bad things that could happen in the near future:
- peak oil leading to world war 3
- climate change making big areas of the planet uninhabitable, leading to wars and extreme immigration / emmigration conflicts
- mass islamisation and desctruction of freedom
good things that could happen:
- fusion power / solar solving the energy problems of mankind
- asteroid mining could give us access to 1000x the resources we have now
- artifical intelligence could speed up research exponentially
2) because humans are biased, emotional and suffer from short term-itis, recency bias and so on:
- framework has to protect the investor from himself, rules should be set up in advance when changes will be made, and the framework should not require much active action from the investor (maximum a few times a year)
- decissions must be based on hard facts that are easily measureable (example: inflation is measureable, if you dont change the metric, oil prices are measureable, demographics of populations are measureable)
so because I'm kinda agnostic towards the future, I should bet like 50% on a good future and 50% on a bad future (EV of each bet being the same)
But instead I want to bet 2/3 on a "good" future and hedge against a bad future with 1/3 of my capital.
I still hope and wish that mankind will solve our problems and we will colonize the stars one day, so this 2/3 1/3 alocation will make me feel better.
Hope you understand this logic. If the EV of each bet is close to each other, I will tilt my decission towards the bet that makes me feel better.
The only non-agnostic assumption I make, I think inflation is more likely than deflation. I just have a deep distrust of fiat currency, and I think this is justified from history.
So my asset allocation will be:
2/3 prospertiy assets, 1/3 recession assets
2/3 inflation hedges 1/3 deflation hedges
I also have to say, because of the big social security network we have here in austria, this is also a reason for me to be a little bit more on the aggressive side (government pension is like a very longterm duration bond that you cannot sell)
So my asset allocation will be:
4/9 global stock market (prosperity & inflation hedge)
2/9 fixed income (p2p lending, and some corporate bonds, maybe also some government bonds) (prosperity and deflation hedge)
2/9 gold (physical and offshore account), recession & inflation hedge
1/9 cash (recession & deflation hedge)
also from the 1/3 recession allocation I will invest into making myself more self sustainable, a little bit of prepping and so on, basically total collapse hedges
I also want to setup rules in advance when I will have to rethink this allocation, but I'm not so sure about them, so I would like to discuss them with you guys:
- oil price ricing above a certain value
- interest rates for short term cash rising above 2%
- some big government (USA or EU) accepting bitcoin as a currency (could make more sense than to hold bitcoin instead of cash and gold)
- big companies investing into asteroid mining (could destroy gold prices)
- unemployment hitting a certain level in austria, let's say 15%
I'm not sure which rules would be most useful. it shoudl not be too many rules, and they should be easy to verify and measure.
Also, If some of the thresholds is hit, I will have to delay my decission by at least one month, to avoid making decissions out of fear / gread.
I think this framework can still be improved a lot, so I'm very open to disgussion.
Here are the axioms of the framework (if you dont agree with those, you probably wont agree with the framework)
1) the future is unpredictable, especially on a macro level (think societies, economies, entire nations)
- we dont have model that can explain the world good enough (on the society level)
- even if we had such a model, it would still be almost impossible to predict the long term future, because of chaos theory (very small changes in the start setting lead to gigantic changes a fear years later)
bad things that could happen in the near future:
- peak oil leading to world war 3
- climate change making big areas of the planet uninhabitable, leading to wars and extreme immigration / emmigration conflicts
- mass islamisation and desctruction of freedom
good things that could happen:
- fusion power / solar solving the energy problems of mankind
- asteroid mining could give us access to 1000x the resources we have now
- artifical intelligence could speed up research exponentially
2) because humans are biased, emotional and suffer from short term-itis, recency bias and so on:
- framework has to protect the investor from himself, rules should be set up in advance when changes will be made, and the framework should not require much active action from the investor (maximum a few times a year)
- decissions must be based on hard facts that are easily measureable (example: inflation is measureable, if you dont change the metric, oil prices are measureable, demographics of populations are measureable)
so because I'm kinda agnostic towards the future, I should bet like 50% on a good future and 50% on a bad future (EV of each bet being the same)
But instead I want to bet 2/3 on a "good" future and hedge against a bad future with 1/3 of my capital.
I still hope and wish that mankind will solve our problems and we will colonize the stars one day, so this 2/3 1/3 alocation will make me feel better.
Hope you understand this logic. If the EV of each bet is close to each other, I will tilt my decission towards the bet that makes me feel better.
The only non-agnostic assumption I make, I think inflation is more likely than deflation. I just have a deep distrust of fiat currency, and I think this is justified from history.
So my asset allocation will be:
2/3 prospertiy assets, 1/3 recession assets
2/3 inflation hedges 1/3 deflation hedges
I also have to say, because of the big social security network we have here in austria, this is also a reason for me to be a little bit more on the aggressive side (government pension is like a very longterm duration bond that you cannot sell)
So my asset allocation will be:
4/9 global stock market (prosperity & inflation hedge)
2/9 fixed income (p2p lending, and some corporate bonds, maybe also some government bonds) (prosperity and deflation hedge)
2/9 gold (physical and offshore account), recession & inflation hedge
1/9 cash (recession & deflation hedge)
also from the 1/3 recession allocation I will invest into making myself more self sustainable, a little bit of prepping and so on, basically total collapse hedges
I also want to setup rules in advance when I will have to rethink this allocation, but I'm not so sure about them, so I would like to discuss them with you guys:
- oil price ricing above a certain value
- interest rates for short term cash rising above 2%
- some big government (USA or EU) accepting bitcoin as a currency (could make more sense than to hold bitcoin instead of cash and gold)
- big companies investing into asteroid mining (could destroy gold prices)
- unemployment hitting a certain level in austria, let's say 15%
I'm not sure which rules would be most useful. it shoudl not be too many rules, and they should be easy to verify and measure.
Also, If some of the thresholds is hit, I will have to delay my decission by at least one month, to avoid making decissions out of fear / gread.
I think this framework can still be improved a lot, so I'm very open to disgussion.