My Antifragile Investment Portfolio

If you thought that 2020 was a rollercoaster, my hunch is that 2021 has something special in store for us.

Barely one month in, the (former) democratically elected President of the United States fumbled Order 66. The S&P 500 and Bitcoin hit their all-time highs. “Meme stocks” became accepted financial jargon. A bunch of anti-establishment retail investors brought Wall St hedge funds to their knees. And as I write this, the global supply of silver is in the midst of being controlled by a subreddit.

The point I’m trying to make is that the future is uncertain and as Nassim Taleb would say, I make no time for the “charlatans” who think they can map it.

As a twenty-something-year-old, I have found myself asking what this means for my own fledgling asset portfolio. The financial press swivels between warnings of unchecked hubris followed by explanations of why “this time is different”.

Meanwhile, there seems to be an endlessly tantalizing buffet (pun-intended) of growth stocks, IPOs, SPACs, Bitcoin, Altcoins and meme stocks to choose from. It’s difficult to decide whether to play it safe or go all-in on the latest trend.

It’s a question I get asked myself a surprising number of times. One would almost believe that being a startup founder gives you a license to forecast macroeconomic trends (it does not). So my approach has been to work from first principles and develop an ‘antifragile’ portfolio.

For the uninitiated, antifragility is a concept coined by Nassim Taleb which refers to how certain things can gain from disorder. Applied to investing, an antifragile portfolio should not just be able to weather a downturn, it should benefit in the midst of crisis and chaos.

The conventional antifragile approach to investing calls for a “barbell” distribution, where on one side of your barbell you minimize downside (e.g. by staying in cash), while on the other side you make calculated high-risk bets. Importantly, it is up to you to choose an acceptable level of loss to avoid getting wiped out, reflected by how you distribute your barbell.

My approach to an antifragile portfolio builds on these foundations, but with more specificity and adapted to my risk appetite. The premise is that there are, in my mind, three equally likely yet opposing scenarios that could well play out over the coming year.

Scenario 1: The roaring twenties

Much like in 1918, the end of the pandemic ushers in a decade of prosperity. Technology saves us and the stock market continues to boom. Insane valuations don’t look so insane when taken as an aggregate and are spurred on by the trifecta of accumulated savings, low-interest rates and quantitative easing which continues to boost asset prices. 

When you consider that bank deposits and government bonds pay nothing, this seems feasible. The current extended rally seems to be a manifestation of “TINA” (there is no alternative). People who buy anything are richly rewarded.

In this scenario, all assets win (index funds, growth stocks, real estate, etc).

Scenario 2: The great deflation

If you held a gun to my head, I consider this the most likely scenario. Administering the vaccine turns out to be a hell of a lot harder than making it thanks to government incompetence (this might just be a U.S. issue as the UK vaccine roll-out has been phenomenal).

Job losses globally accelerate while government and corporate debt continue to balloon. A double-dip recession ensues. Income inequality worsens.

In this scenario, cash provides the ultimate optionality to go bargain hunting. Value investing makes a comeback. The caveat, of course, is that the stock market is not the economy and as we saw last year the stock market may continue to rally while all of this plays out.

Scenario 3: (Hyper)inflation

If something seems too good to be too, it probably is. That’s how I feel every time I think about the US economic miracle aka the Fed, that can apparently whip up new money without any consequences?

There is a scenario where central banks continue their unprecedented printing, increasing the money supply by double-digit percentages every year. Central bankers rationalize their behavior using the CPI scam. The events of Zimbabwe and the Weimar Republic start to look increasingly familiar.

The US dollar loses its status as the reserve currency of the world. People flee for gold and Bitcoin (and Dogecoin?). While I believe that hyperinflation is unlikely, inflation in things that matter, such as healthcare, property, education, seems inevitable. 

With the IMF calling for a new Bretton Woods moment, fiat currencies are clearly already on shaky ground. That’s why I am bullish on Bitcoin even without hyperinflation playing out. Bitcoin is a hedge against the dubious monetary system and the negative consequences that accompany it.

In this scenario, bitcoin, gold and commodities win.

My antifragile portfolio

The truth is that I have no idea which, if any, of these scenarios will come to pass. To an extent, it doesn’t matter. 

The purpose of an antifragile portfolio is to limit the risk of being wiped out, whilst retaining the potential for uncapped upside. Therefore, the goal is not to maximize gains in a specific scenario, but to perform well in any of the scenarios. 

This requires investing in a diversified set of uncorrelated or low correlated asset classes that are balanced and not over-leveraged, an approach first pioneered by Ray Dalio’s All-Weather portfolio. 

Hence, my antifragile portfolio looks something like this: 30% cash, 30% Bitcoin and finally 40% equities and index funds.

You can achieve a similar effect by mixing in real-estate and/or replacing Bitcoin with commodities, especially gold. Remember, you are trying to choose a mix of asset classes that can withstand pressure no matter what is happening in the outside world (inflation, deflation, prosperity or stagnation). 

Improving my financial literacy

It has been a personal goal to improve my financial literacy over the past couple of years and I’m glad to have recently graduated to the “valley of despair” as measured by the Dunning-Kruger effect.

I’ve included a few of the most informative resources below in the hope that they help others:

To conclude, this shouldn’t be taken as any form of financial advice! I’m open to being totally wrong and curious to hear how others are approaching the same challenge.

No Spam. No Fluff. No Noise.