We have been big believers of Nasim Taleb's concept of "antifragile" when thinking about portfolio building. You want a portfolio that will gain from uncertainty and not just be resilient. His book, Antifragile, was a path-breaking extension of his earlier work, yet it seems to have had limited impact on investment thinking. Those who have passed on these concepts are hurt.
2016 may turn into a year of disorder and transition. It certainly feels that way as we enter the third week of the year. If there is more uncertainty and market turbulence, investors should want a portfolio that will gain from disorder. Investors want a portfolio that will do well if government policies are mishandled, markets reactions are unclear, or models seem to give false signals.
The world seems very fragile. We are less than a month away from the last FOMC meeting and there is already talk that rate increases should be on hold. Policy in China is more opaque than a year ago. The credit cycle seems to have turned. The international capital flow cycle has turned and there is concern about the global business cycle. Investors should not want a portfolio build for zero rates.
The antifragile portfolio will have a positive convexity bias and not be overly optimized. It will have a divergent bias. It will be less dependent on fundamental models and more dependent on market behavior. The current environment calls for a portfolio that has more trending characteristics regardless of time frame. A managed futures or positive crisis beta portfolio will do well in this environment.
From Taleb's perspective you don't want a portfolio that is just resilient and bounces back from adversity. That would be a "sissy move". Investors should want a portfolio that will do well in this environment. Of course, if you feel that the economy is not doing poorly and policy-makers can learn from their mistakes and will get us out of the next jam, then a strong bias to an antifragile may not be your preference, but the risk is that you may be wrong. We already know the costs of policy mistakes from 2008.
The graphics are from Innolution.com
For more of my thinking on anti-fragile and managed futures see my posts Managed Futures as an Antifragile Strategy, Describing disorder, Quotes from Nassim Taleb's Antifragile, and Antifragile will change your thinking. )