Asset Class Junkie

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ThisDinosaur
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Asset Class Junkie

Post by ThisDinosaur » Sun Mar 11, 2018 12:38 pm

Ray Dalio has said that the benefits of diversification max out at 15 uncorelated bets. But as far as I can tell, once you get past five asset classes, you're just adding more stuff that behaves the same as something you already own. Tyler's site has them broken up into four-five groups that tend to move together. So what are some investible assets that will do well when cash, bonds, equities, real estate, hard assets and international equivalents of them dont?

wolf
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Re: Asset Class Junkie

Post by wolf » Sun Mar 11, 2018 1:51 pm

Do you mean commodities by hard assets? There are also corporate bonds. And you could also include real assets e.g. infrastructure projects, ... But I would like to know about those 15 uncorelated assets.

NPV
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Re: Asset Class Junkie

Post by NPV » Sun Mar 11, 2018 5:12 pm

ThisDinosaur wrote:
Sun Mar 11, 2018 12:38 pm
So what are some investible assets that will do well when cash, bonds, equities, real estate, hard assets and international equivalents of them dont?
Doesn't cash by definition perform well when everything else tanks? As everything else tanking = its cash-denominated prices tank, hence you can pick everything up at discount if you have cash.

NPV
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Re: Asset Class Junkie

Post by NPV » Sun Mar 11, 2018 6:14 pm

In theory I guess you could have runaway inflation while all asset prices hold steady, then both cash and other assets perform poorly. In which cases, assuming this is happening globally, a ticket on Elon's Mars ship is probably the best hedge...

oldbeyond
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Re: Asset Class Junkie

Post by oldbeyond » Mon Mar 12, 2018 1:48 pm

Not saying that they will save a portfolio, but cryptocurrencies seems to exist in a world of their own. Which might be interesting if you're looking for negative correlations. I tend to agree with you that there's a serious case of diminishing returns when it comes to slicing asset classes ever more finely in asset allocation.

IlliniDave
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Re: Asset Class Junkie

Post by IlliniDave » Mon Mar 12, 2018 5:53 pm

The biggest difficulty is that so many classes will at times become highly correlated at just the time you are counting on them being uncorrelated. I really have only four types of assets: stocks, bonds, real estate, and cash. The true decorrelators are probably grit and personal skills.

NPV
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Re: Asset Class Junkie

Post by NPV » Tue Mar 13, 2018 8:16 am

Ammo, guns, and bunkers are some other good hedges which will likely rise in price if everything else crashes really badly.

ThisDinosaur
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Re: Asset Class Junkie

Post by ThisDinosaur » Thu Mar 15, 2018 11:58 am

Good call on the cryptocurrencies. I'm not a fan, which is exactly why I should probably consider holding some. Ammo, guns, bunkers and grit are all hedges for a collapse of the financial system. As opposed to financial assets. Other nonfinancial wealth assets are productive land and fine art.

There are a couple of different ways to look at the idea of uncorrelated assets. The standard way is to just look at the movement of asset prices over the last x number of years and see which ones moved together vs. opposite. The other way is to consider specific potential economic shifts/events and pick the class where a particular asset will outperform. The permanent portfolio assumes four cyclical kinds of shift. A fifth would be the above mentioned collapse of the world financial system, while another would be a local-only collapse (in which overseas investments are the hedge.) Cash works in a recession or a credit crunch.

Bridgewater's current holdings (Dalio is no longer there, incidentally) include a roughly equal split of US, developed, and emerging market equity indexes which make up 2/3rds of their portfolio. Followed by ~5% gold and a long list of foreign and domestic sovereign and corporate bond funds. Reminds me of taleb's risk barbell.

jacob
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Re: Asset Class Junkie

Post by jacob » Fri Mar 16, 2018 7:49 am

I'm certainly looking forward to Dalio's book on investment principles. Based on reading his first book, it's my impression that his model is not a simple diversification scheme but rather an algo with a decision tree type structure based on a historical interpretation.

I think the primary problem for the rest of us is the "investible" keyword. At the retail level, we're simply not going to get into Puerto Rican munies or preferred stock from an obscure Swedish bank in the same way. One interesting approach here is the Alpha Strategy by Pugsley. This was written during a period of high inflation, the late 1970s or so, so he suggests storing goods you use, particularly tools and supplies (like house paint), and putting the rest into rolling metal futures to the point of even taking delivery! This strategy would not have fared well in terms of growth since then ... but most of the stuff one would have stored back then would still be useful except the suits and the disco music.

ThisDinosaur
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Re: Asset Class Junkie

Post by ThisDinosaur » Sat Mar 17, 2018 10:59 am

Alpha Strategy was a good book and has influenced my approach to FI. Diversify out of "money" and into the stuff you intend to buy with money. I'm always interested in new ways to do that sort of thing. But I'm limited in my creativity there and I'm going to need fungible currency for another ~40 years.

I'm sure Dalio has a more sophisticated understanding of diversification than I do. One of the things he's said that resonates with me is, "almost everything happens over and over again through history, and the key to success is to identify what 'One Of Those' it is, and to look how it’s worked in the past."

I think investors make up a story about how the economic machine works and make predictions based on it. The market is a voting machine for those stories. And you don't know which story will be right until after the fact, so it makes sense to look to history for a list of things to be prepared for.

In other words:
jacob wrote:
Fri Mar 16, 2018 7:49 am
an algo with a decision tree type structure based on a historical interpretation.

trfie
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Re: Asset Class Junkie

Post by trfie » Fri Mar 23, 2018 4:47 pm

ThisDinosaur wrote:
Thu Mar 15, 2018 11:58 am
Other nonfinancial wealth assets are productive land and fine art.
I don't think it's possible for the individual investor to get into fine art at this point. I imagine soon it will be possible through blockchain, to buy fractional amounts of a fine art that is guarded in a secure location. But haven't heard of it yet.

Edit: Looks like there is already a company working on it:
https://www.maecenas.co/
Does not seem that any artwork is available for sale yet. But once it is, I would consider investing in it.
and putting the rest into rolling metal futures to the point of even taking delivery!
Why rolling metal futures instead of just buying the metal (including through an ETF with physical holdings)?

trfie
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Re: Asset Class Junkie

Post by trfie » Fri Mar 23, 2018 5:04 pm

NPV wrote:
Sun Mar 11, 2018 5:12 pm

Doesn't cash by definition perform well when everything else tanks? As everything else tanking = its cash-denominated prices tank, hence you can pick everything up at discount if you have cash.
Absolutely not. Cash (USD) has lost 98% of its value in the past 100 years, in terms of purchasing power. You would have been much better off holding gold. Prices can be denominated in any currency (eg, yen, yuan, peso, etc). There are fluctuations in exchange rates across currencies over time.

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Kriegsspiel
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Re: Asset Class Junkie

Post by Kriegsspiel » Sat Mar 24, 2018 10:45 am

Paper dollars in a mattress, sure; but rolling treasury bills, which I assume is what NPV is referring to, didn't. T Pain has an article about it here.

But that aside, NPV is correct in what he's saying, having cash while other assets tank means you're doing better than if you didn't. In his diary of the Great Depression, you can feel Benjamin Roth's FOMO, wishing he had some cash to pick up the cheap assets he saw.

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Re: Asset Class Junkie

Post by jacob » Sat Mar 24, 2018 2:18 pm

Public service announcement/Reminder from the forum rules.

2) DON'T USE THE QUOTE FUNCTION AS A REPLY BUTTON! Some people use phones or textreaders to keep up, so please don't abuse the quote function. Don't quote the entire post you're responding to. Because if you do, people have to scroll through all that only to learn that you're just responding to the post above :( IF you're responding to the entire post (which is the case in most cases), just start your post with @theirusername. Then respond. Only use the quote function when/if responding to specific paragraphs or sentences and edit everything else out.

trfie
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Re: Asset Class Junkie

Post by trfie » Sat Mar 24, 2018 7:13 pm

@Kriegsspiel, NPV used the word "cash" and not treasury bills. It's not a moot point because certainly many have cash in checking/savings accounts and not in T-bills. But the link you posted demonstrates my point. If you look at the graph of the US, holding treasury bills, almost the entire chart has a return around 0%, there is a large recent negative portion, and just a single positive performance area that is not very large. In addition, presumably this is US inflation-adjusted numbers, which does not take into account purchasing power, a more accurate measure, and which would show depreciation of one currency compared to another.

NPV is not correct when NPV stated
Doesn't cash by definition perform well when everything else tanks? As everything else tanking = its cash-denominated prices tank, hence you can pick everything up at discount if you have cash.
A fall in cash-denominated prices is a tautology and the sentence would not have been written. So presumably NPV means that cash (not treasury bills, since prices of assets such as the ones in this thread are NOT denominated in treasury bills) is a safe asset. But any asset can be denominated in another asset. Eg, denominating cash in gold would make gold seem like the safe asset, since the value of cash fell in terms of gold.

NPV
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Re: Asset Class Junkie

Post by NPV » Sun Mar 25, 2018 2:37 am

trfie wrote:
Fri Mar 23, 2018 5:04 pm
Well, the thing is, everything else didn't tank but actually experienced the most bullish market in history (including stocks, bonds, gold). Never have I implied that cash is a safe asset for all times. I was simply responding to the original question of what asset will do well when stocks, bonds, commodities etc. tank and arithmetically cash seems to be the answer.

NPV
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Re: Asset Class Junkie

Post by NPV » Sun Mar 25, 2018 2:39 am

Whether cash is 30 day treasury bills or physical dollars under the mattress is less relevant for this point. Basically if stocks tanked 50% you can now buy 2x stocks with your cash.

And you can see above that I called out a hypothetical hyperinflation + financial depression scenario as well as an exception to this logic.

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bryan
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Re: Asset Class Junkie

Post by bryan » Sun Mar 25, 2018 8:08 pm

trfie wrote:
Fri Mar 23, 2018 4:47 pm
ThisDinosaur wrote:
Thu Mar 15, 2018 11:58 am
Other nonfinancial wealth assets are productive land and fine art.
I don't think it's possible for the individual investor to get into fine art at this point.
You could get into more lowbrow or folk stuff if you made the effort. Lots of starving artists out there.
trfie wrote:
Fri Mar 23, 2018 4:47 pm
and putting the rest into rolling metal futures to the point of even taking delivery!
Why rolling metal futures instead of just buying the metal (including through an ETF with physical holdings)?
Mostly guessing but.. I think futures have less spread or other costs (and are more liquid) than physical metal. Haven't looked at ETFs with physical holdings that much, but I suppose trust is a major sticking point for many. Plus these "physical holding ETFs" are limited to gold mostly.. no copper, zinc, etc.

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