Thread by @TaylorPearsonMe

1/ Imagine you are about to be cryogenically frozen for a hundred years.

Before you are frozen, you have to make a decision about your investment portfolio. Knowing that you couldn’t change it for 100 years, how would you allocate it?

2/ This was the prompt for @vol_christopher's recent research paper: The Allegory of the Hawk and Serpent

docsend.com/view/taygkbn

I published a review on my site today: taylorpearson.me/thedragon/

3/ Cole argues that over the past 80 years, we have seen four generational seasons of markets:

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

4/ These periods can be classified as periods of the Hawk or the Serpent.

5/ The Serpent represents the periods of secular rebirth (1947-1963) and secular boom (1984-2007). It characterizes periods of growth and rising asset prices.

Serpent assets include those assets which perform well in periods of growth such as stocks, bonds and real estate.

6/ The Hawk represents periods of secular decline (1929-1946) and secular stagnation (1964-1983).

Hawk assets are those which do well in periods of decline or stagnation: gold, long volatility/tail risk, and commodity trend following.

7/ For a portfolio to survive 100 years, it must navigate periods which embody the Hawk as well as the Serpent.

8/ 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.

9/ 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

Interest rates are near zero.

10/ The classic 60/40 Equity/Bond portfolio is highly reliant on assumptions based on a once-in-a-century bull market in Stocks and Bonds from 1984 to 2020.

In fact, stocks and bonds have been moderately or highly correlated in 89% of months going back to 1883.

11/ Cole believes that the excellent performance of Bonds over the past 40 years is the direct result of central bank policymakers aggressively cutting rates (19% in 1981 to 0% by 2009) during any period of crisis.

12/ What is the solution? What has actually worked over the past century? And what can that tell us about what will work over the next century?

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

Domestic Equity (24%)
Fixed Income/Bonds (18%)
Active Long Volatility (21%)
Commodity Trend Following (18%)
Physical Gold (19%).

This is the Dragon Portfolio - the combination of Hawk and Serpent

14/ This allocation is highly unorthodox compared to a traditional pension portfolio dominated by Equity-Linked assets (73%) and Fixed Income (21%), or a 60% stock/40% bond portfolio that is frequently recommended to individual investors.

15/ The portfolio compounded at +14.4% per year between 1928 and 2019. It generated double the returns as a Traditional 60/40 Portfolio with half the drawdowns.

16/ For a deeper look at each of the asset classes, I highly recommend reading the full paper - docsend.com/view/taygkbn

I also wrote a summary on my site with some actionable steps for non-institutional investors: taylorpearson.me/thedragon/