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"Investing is simple, but not easy." – Warren Buffett

"Perhaps, however, it was the epoch that made the man as opposed to the man that made the epoch." – Bill Gross

In a benchmark-driven investment world, the manager’s primary task is frequently drowned in the noise of a short-term relative performance derby1. So, what is the investment function's primary task? It boils down to preserving and growing client's wealth at inflation-adjusted rates, consistent with long-term returns of the requisite asset class, and to do so without taking undue risk of a “permanent loss of capital”.

The anti-fragile portfolio. The chart below illustrates the types of assets required to construct a portfolio designed to do well across different investment and economic environments.

Figure 1: An illustrative portfolio allocation

To build portfolios that are genuinely robust across market environments, we need to combine various asset classes, especially asset classes with relatively low correlations.

Three problems: Investment and economic environment

As we survey the investment world, three problems inhibit an investors' ability to construct robust portfolios that can generate healthy inflation-adjusted returns. First is the equity pricing bubble. The broader equity markets are priced for poor prospective returns – well below the historical real returns from equity. Two, the credit – fixed income bubble. Interest rates are close to zero or negative in most advanced economies. Indeed, "real" rates are in negative territory for all significant economies, developed as well as emerging. And three, an unchecked appetite to resort to quantitative easing (QE). While the coronavirus pandemic drove policymakers to engage in extensive stimulus packages and even more QE, the trend towards the depreciation of cash has been in place for much of the past two decades (indeed since centuries across various civilizations)!