We're On Cash Pad Tonight!

And a look at a Talebian Asset Allocation

Our Airbnb is being featured on tonight's episode of Cash Pad on CNBC. The remodel was done during the first week of June. It's kind of been a long summer waiting for our episode to finally air. We're very excited and hope everyone can check it out. We'll be having virtual watch parties at our Airbnb's Facebook page and Instagram page. Please join us, it should be fun and funny.

This morning Gil Weinrich from Seeking Alpha laid out a gloomy scenario in his podcast for the next decade along the lines of what Ray Dalio has been talking about lately. In there he posits an asset allocation for the next decade consisting of 1/3 in risk assets like equities, 1/3 in real property and 1/3 in cash proxies. In with the cash proxies he would include an unquantified allocation to gold.

Gil is neither right nor wrong. There is no single answer for everyone. What he proposes could absolutely be one of many effective plans. If he thinks 1/3, 1/3, 1/3 like makes sense then I'd imagine he thinks it's right for him. Learning about how others view asset allocation is a fun and useful endeavor. While this conversation usually focuses on a stagnant mix I think it needs to be more of an active process.

If the equity market drops 30% it often makes sense to increase equity exposure a little bit. That idea is not about trying to bottom tick the market but stocks are less likely to go down a lot after they have already gone down a lot and even if someone had increased their equity exposure at at SPX 1000 during the crisis, so no where near the bottom, they came out well ahead of where they otherwise would have been.

For someone retiring today, I would consider greatly reducing equity exposure over concerns of an adverse sequence of returns. Again not an attempt to top tick the market but after many years of rising markets, an adverse sequence can wreak havoc on a retirement plan as we've laid out in quite a few other blog posts. Some have talked about raising 2-3 years of expected cash needs from equities and there other ideas but the high level takeaway is making yourself more financially resilient at a potentially vulnerable time for both markets and personally.

Another way to come at this is Nassim Taleb's idea on allocation which is to put a huge percentage, like 90% in the safest of holdings and 10% is very risky holdings. When I first heard him talk about this he said 90% in T-bills from around the world and 10% in risk assets. From what I have read this has evolved some, he talks less about foreign T-bills and I think the way he takes risk has become more sophisticated which is only logical after more years of learning.

I've often talked about lottery ticket stocks and the extent to which people often find out the hard way they had too much in a lottery ticket biotech stock, like after an adverse FDA ruling. Things like lottery ticket biotechs and for that matter Bitcoin offer asymmetric risk which is what Taleb is talking about with his 10% risk bucket, very risky bucket. The key with his idea is to not put all 10% into one risky bet. I've been transparent about owning a little Bitcoin in this context. It could go to zero or some astronomically high number that the touts say. I have no idea, I agree there's nothing underpinning it but concede that could change somehow where it becomes accepted. I've read too much to watch it go to a bazillion without me. Similarly, I own a few shares of Maven stock, The Maven hosts my blog. I have no clue whether the bull case plays out but I've heard it a few times, I am writing here and like with Bitcoin, I don't want to miss out after investing so much time here if somehow it does go up a lot. Both could go to zero with no impact, that is how to size lottery tickets. SSRN has some thoughts on this topic and notes it often doesn't end well for investors.

Following up on the idea of taking bits of process from various sources to create your own process, this is how Taleb has influenced my personal process, I've learned to have an appreciation of asymmetric risk (it's a crap shoot), for whom it is and is not suitable and how to size it.

Risk is not what does people in, they get done in by not understanding risk which causes them to misuse it resulting in a permanent impairment of capital.

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