ETF Investing Below 2800: Diversify, Diversify, Diversify!

• Article
• 2024-04-07
• 13 Comments

Recently, there has been a lot of talk about multi-asset allocation, which reminds me of a book I read a long time ago called "Harry Browne's Permanent Portfolio."

The multi-asset investment strategy discussed in the book was proposed by the late American investment writer Harry Browne in the 1980s.

It aims to protect investors' assets through diversified investments, providing stable returns regardless of how economic conditions change.

The allocation is actually quite simple—stocks, long-term government bonds, gold, and cash, with each asset class accounting for 25%.

Then, when the proportion of a certain asset exceeds 35% or falls below 15%, it is automatically adjusted to 25%.

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In other words, when there are significant changes in the market, rebalancing is done in a timely manner.

Brown's focus is on "permanence" because the riskiest stock position only accounts for a quarter.

In addition, some investment masters have also publicly shared their multi-asset allocation ideas—For example, Graham mentioned in "The Intelligent Investor" that stocks and bonds should each account for 50%, and Yale's endowment manager David Swensen is 60% stocks, 30% bonds, and 10% real estate, and so on.

On the topic of multi-asset allocation, we recently invited an ETF expert to delve deeper, and during the conversation, he mentioned the CSI MARP Index (930929), full name is the CSI Multi-Asset Risk Parity Index, which is a very good demonstration and verification of the effect of multi-asset allocation.

Although this index only includes three types of assets—stocks, bonds, and gold—it has been setting new highs repeatedly at the moment when the market is approaching 2700 points.

The core reason is that the steady bonds and the recent record high gold prices have provided a bottom for the stock market.

In addition, the benchmark for "all-weather" multi-asset allocation—Bridgewater Fund—was also mentioned during the exchange.

Its management scale also shows everyone's recognition of this old investment institution.

So, whether for professional investors or ordinary investors, diversified asset allocation is the only free lunch in investing.

We have organized the exciting content of this exchange to share with everyone, to see how to do a good job in multi-asset allocation to achieve the ultimate goal of "long-term returns and short-term low volatility."

Question: The market has been bottoming below 2800, what actions have you taken recently?

Answer: I made minor adjustments, but all in accordance with the principles mentioned earlier.

In the last exchange, I said that I think the performance of the Dow Jones may be better than that of the S&P 500 and Nasdaq 100 in the future, because technology stocks have been rising for too long and too high, and the recent performance has also verified my previous prediction, so I made some structural adjustments.

For U.S. technology stocks, there are two points to note: First, cyclicality, because there is indeed a bubble at present, so we should be cautious about this round of technology stock upcycles; second, relatively speaking, interest rate cuts are more beneficial to traditional industrial stocks, and the impact of interest rate cuts on technology stocks may not be that great, because their core influencing factors are mainly growth and technology cycles.

Although the big allocation can be left alone, rebalancing and structural adjustments are still necessary, especially when the environment changes.

As long as the adjustments are within the risk budget, the impact on the portfolio will not be that great.

Short-term fluctuations still have an impact on most people, unless your cycle is very long, and you can ignore the fluctuations in the middle, so I have always emphasized the importance of multi-asset allocation and structural adjustments.

Question: When making multi-asset allocation, how do we ensure that the gains and losses of various assets do not offset each other as much as possible?

Answer: When we talk about multi-asset allocation, it's not just about the quantity; it's about having different underlying drivers for the investment targets, showing low correlation, which is what we call multi-asset allocation.

When we do multi-asset allocation, we certainly hope that most of the assets we choose will rise in the long term.

However, some assets may not necessarily rise much in the long term, but we still need to allocate them, such as cash assets that may not even be able to resist inflation; even gold may not make much sense at a certain stage, and gold itself does not generate cash flow, it is not an income-generating asset.

Just like water, although it has no taste, we all add water when we cook.

When the market falls, cash and gold can ensure that our portfolio does not fall too much; at the same time, when opportunities come, it also allows us to have bullets to do rebalancing, and through flexible allocation, we can buy the right assets at a low price.

Those assets that can bring long-term high returns to the portfolio generally have larger fluctuations, even if we have done multi-asset allocation, they may offset each other or be negative in the short term.

Ultimately, achieving "long-term returns and short-term low volatility" is the core of multi-asset allocation, not just focusing on short-term gains.

Question: You mentioned a situation before, where every sub-asset in the portfolio did not set a new high, but the entire portfolio set a new high, how is this possible?

Answer: The CSI MARP Index (930929) only includes three types of assets—stocks, bonds, and gold.

Equity is bought in the form of the CSI 300 and the CSI 500, bonds are bought in the form of medium-term government bonds and medium-term corporate bonds, and gold is bought in the form of the Huaan Gold ETF.

You can see on May 10th, none of these three assets—stocks, bonds, and gold—set a new high, but this index did set a new high.

This is a very good verification of multi-asset allocation, when one asset falls, another can make up for it; or when one asset has a small increase, another can add icing on the cake.

Why can Bridgewater's scale be so large?

It is because Bridgewater classifies assets and separates the correlation of each type of asset, and the final strategy and results are different from other companies.

In other words, Bridgewater and other companies have a low correlation, so everyone is willing to buy Bridgewater's products, because buying Bridgewater's products naturally achieves the purpose of multi-asset diversification.

Question: How can individual investors accurately judge the correlation between two industries?

Answer: The most direct method is data analysis, calculating correlation according to statistical methods.

But this is far from enough, because what is calculated is only the result, you still need to analyze the cause, the best way is to combine quantitative and qualitative, when you have an economic and financial explanation, then go back to verify that data.

It should be noted that the correlation between assets will change, two industries that are not related may suddenly become negatively correlated or positively correlated at a certain stage, such as when liquidity is particularly poor, there may be a stock and bond double kill, so it is necessary to continue to track.

But continuous tracking does not mean that you have to look at it all the time, but when the correlation changes, you go to study and verify, so the efficiency is the highest.

Question: Can it be said that whether to do diversified allocation largely depends on the performance of the local market, such as Buffett in the 2010s of the 21st century, who did an investment portfolio centered on the United States, but in recent years has also invested in the Japanese market, and at the same time, cash and U.S. Treasury positions have also reached a new high, what insights can we get from these investment masters?

Answer: I think local investment is not absolute, it does not mean that the local must be allocated more, but many people have local preferences, or local biases, just like Chinese people are more accustomed to eating Chinese food.

Why do people tend to invest in A-shares, because everyone is more familiar with the A-share market, can more intuitively feel the changes, and may feel more secure in investing in A-shares.

Of course, now more and more people are accustomed to eating Western food, from the perspective of doing global asset allocation, I still suggest to allocate some other markets.

In fact, Buffett did not emphasize allocation at the beginning, but now he has also bought Japanese stocks, and before that, he bought BYD, PetroChina, and so on, so doing global asset allocation makes sense.

And you see that Buffett now has a lot of cash on hand, which is also a balance.

Question: The Bank of Japan has made a lot of money buying ETFs in the past decade or so, one is long-term investment, and the other is high discipline, every time the Nikkei 225 index falls more than 2%, it will increase its position by 7.01 million yen, can we follow the "national team" to do ETF investment?

Answer: The central bank buying ETFs is often not for the purpose of making money, but for policy regulation goals, but there is no doubt that it is a good thing for the stock market, so in the end, it may be possible to achieve both policy goals and profits, just like the Bank of Japan buying ETFs.

What we can learn from the Bank of Japan, I think, is to buy at a low position and invest for the long term.

When it started buying in 2010, the Japanese stock market was very depressed, but it has gone through a big bull market in the past decade.

At that time, Abenomics had a very positive effect on the economy, with two logics, the first is that the policy itself has economic goals, if I predict that the economy may improve, then my investment will make money; the second is to release liquidity, which is beneficial to stock market investment.

Our current policy is also going to be loose, so if the economy improves in the future, there may also be a double hit effect, but the market fluctuates a lot in the short term.

As for whether we can copy the "national team" homework, I think to a certain extent, it is possible, but it is not necessary to buy the same target, because making money may not be the most important goal for the "national team" to buy ETFs, but for investors it is.

Now you see that the assessment cycle of insurance funds has been extended, because if it is a short-term assessment, insurance funds may not dare to buy stocks, the fluctuations are too large, social security funds, public funds are also extending the assessment cycle.

Long-term funds come in, the backbone of the market has support, coupled with new funds entering the stock market through products or individuals investing directly, the market will gradually stabilize.

If the finance does not exert force, the state-owned enterprises do not take the lead, and individuals do not invest, it will form a vicious cycle, so now it is guiding multiple forces to exert force, such as setting up many funds to invest in enterprises, reducing the loan pressure on the people, increasing consumer demand, and so on.Let's first improve the economy and then create a virtuous cycle, so I personally am not that pessimistic about the future.

Question: Whether for national teams or individual investors, is a broad-based index the broader the better?

Answer: My positioning on broad-based indices is that one cannot bet too heavily on a single style, while the industry layout should be slightly broader.

For example, the dividend index was originally intended to be broad-based, but in the end, it was concentrated in just a few industries, which sometimes is not as stable as the traditional broad-based indices.

Therefore, it is necessary to look at the index compilation method, to see how the actual stocks are composed, how the actual industries are composed, and even how individual stocks are weighted, because it is possible that the index covers many industries, has all kinds of stocks, but in fact, a few companies still dominate.

The NASDAQ-100 Index is a typical example; it indeed has 100 stocks, but only a few play a decisive role, from the original "seven sisters" to the current "three brothers," and in the end, it may come down to NVIDIA alone.

Question: The Dow Jones Industrial Average does not include NVIDIA.

Answer: Yes, that's why the Dow Jones Industrial or the S&P 500 is relatively more diversified.

Question: Nowadays, many investors are looking at the Hong Kong stock market.

Do you think the Hong Kong stock market, which is undervalued and has a negative correlation with the US dollar index, is a good point to enter now?

Answer: The Hong Kong stock market is relatively undervalued, and if the Federal Reserve cuts interest rates, the resulting capital inflow is also beneficial to the Hong Kong stock market.

Personally, I think that Hong Kong stock investment currently shows a certain cost-effectiveness.

However, even so, I suggest that US stocks should still be allocated, and some structural adjustments can be made, such as transferring part of the NASDAQ position to the Hong Kong stock market, but I do not recommend selling all, because no one has the ability to predict the market for the long term, otherwise, they would directly bet on a single track.

Only in situations like the 2008 financial crisis or the 2020 circuit break, will global major assets fall together.

A financial crisis has a typical characteristic, which is a liquidity crisis, and gold is actually also subject to liquidity.

From the current situation, it is unlikely to have a financial crisis, and once it occurs, it may be necessary to change everything to cash.

Question: A couple of weeks ago, when looking at cross-border ETFs, Southeast Asian technology seemed good, with heavy positions in the leading technology stocks of various countries and regions in Southeast Asia, and it feels like a good target for the long term.

Answer: If you want both low correlation and high growth, Southeast Asian technology is indeed appropriate.

Many enterprises in Southeast Asia are now replicating the experiences of the West and China, including internet e-commerce, new energy vehicles, etc., and will also be compared with Chinese enterprises, such as Grab being the Didi of Southeast Asia, and several Indian technology companies being the Alipay and Tencent of India.

In addition, the demographic dividend in Southeast Asia is still there, which is a big advantage compared to other regions.

If you look at the constituent stocks of the Southeast Asian technology ETF, they are the leading companies in various countries and regions, and I think this is a good tool for allocation.

However, because it goes through QDII, the quota is limited, and it is not possible to allocate too much.

Question: Then would you buy gold?

Do you think gold can still be bought now?

Answer: I generally do not make trend judgments on gold, but I think gold must be allocated, it's just a matter of how much the position is, and I also buy gold, but the position is generally not very high.

I buy gold mainly to reduce the volatility of the portfolio, not to earn returns, and I value the low correlation between gold and other assets.

Because although the price of gold has risen quite a bit in the past period, in the long term, for example, stretching to 20, 30, or 50 years, the return on gold is actually not high, just barely able to resist inflation.

If there is a major change in the international situation, you can buy more gold, and many people even add leverage.

But remember the logic of rebalancing is that when a certain type of asset is undervalued or below my allocation ratio, you can add a bit appropriately, rather than adding it because you are particularly optimistic, which goes back to the logic of buying a single asset.

Theoretically speaking, these important assets should be allocated, so from this point of view, Buffett is not strictly a multi-asset allocation, he mainly relies on his prediction and judgment ability to make investments.

Question: Dividends have fallen quite a bit recently, what do you think?

Answer: If the economy is declining, corporate dividends may also be problematic, and many dividend-paying companies are cyclical stocks, which will not always maintain a very high attractiveness.

Although dividends as a base position are relatively stable, I think the dividend strategy needs to be further strengthened, which is also a problem I have been thinking about recently.

We cannot only look at the dividend yield, because the dividend yield we see can only represent the history, not the future.

Only when the company's industry status is improved, the future profits are guaranteed, so we see that many companies are doing mergers and acquisitions recently, including securities firms, photovoltaic and other industries with overcapacity, which may not see results in the short term, but in the long term, it is definitely good for the industry.

Question: If you have to buy and can only buy 5 investment targets now, how would you choose?

Answer: It is still necessary to choose according to the logic of diversification.

First, A-shares must be allocated because they are now at a low position, and I still have a good expectation for the future; or allocate a bit of A-shares and Hong Kong stocks, both of which have their own characteristics and representativeness.

For A-shares, I might choose the CSI A500, which covers a broader range of industries, is not so concentrated in style, and has more dispersed individual stocks, which is in line with our logic of "the broader the base, the better," and is more representative of the market.

For Hong Kong stocks, I am inclined to buy the internet because the internet in Hong Kong is very representative.

Secondly, for other regions, such as the United States, Southeast Asia, Japan, and Europe, if you can only choose one, I would choose the United States, because in the long term, whether it is the economy or technology, the United States will definitely have a place.

Then, gold still needs to be allocated, at least from the current point of view, it is difficult for gold prices to fall sharply, and the factor of US interest rate cuts is still there, and allocating gold can make our portfolio more stable.

Finally, there should still be some positions in bonds, it is recommended to allocate some short-term bonds with not too long a duration, and the risk of long-term bonds still needs to be vigilant.

For the allocation ratio of different assets, it still needs to be determined based on one's own risk preference and investment objectives, and the allocation ratio of assets with higher risk can be slightly lower.