Stay Curious

Yesterday I had a day-job related lunch with a couple of fund managers and we talked about the potential challenges going forward for the traditional 60/40 portfolio due to investment grade yield being so low, below the rate of inflation in many instances. I've mentioned many times before that most clients own the Merger Fund (MERFX) for its tendency to have bond like volatility which helps offset equity volatility in the portfolio. There are years where it is a bond proxy and other years where it isn't. It may not be that reliable as a bond proxy but having owned it for many years now, I am convinced the low volatility is reliable.

If the prospect of fixed income yields below the rate of inflation is concerning then you need to be curious enough about alternatives to learn about them to assess whether they can help address this issue in your portfolio or in client portfolios if you're an advisor. If you've been reading this blog for any length of time you already know I believe in alternatives. Of course I maintain plenty of fixed income exposure, more in fixed income than alternatives, and the yields vary thanks to fixed income diversification but I think of part of that diversification as alternatives. If an alternative can return 4-6% with very little volatility, how different is that than owning a bond with a "normal" yield? MERFX has done this a few times but of course there have been years where it hasn't. Again, you'd need to draw your own conclusion, like going to new parks and changing my diet, I was curious, I learned and I implemented.

A similar dynamic exists with Bitcoin and asymmetric risk. I would encourage curiosity, taking the time to learn and then drawing your own conclusion. My conclusion is that the asymmetric risk is intriguing enough to own a sliver of it personally but because nothing underlies it and that it could be supplanted by something else, I don't own it for clients--zero is a very reasonable outcome.

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