Building a Portfolio to Withstand Extreme Risks

In today's complex and rapidly changing financial environment, how to design an investment portfolio that can withstand severe market fluctuations has become a focal point for many investors. The following content will explore this topic and provide some practical strategic recommendations.

Current Situation: A World Full of Crises

We are in a contradictory period: the stock market continues to hit new highs, yet long-term government bond yields remain high; the dollar is strong, but consumption is weak; artificial intelligence drives a capital frenzy, while the world faces fragmentation and the risk of war.

The geopolitical situation is becoming increasingly tense: the Middle East is in turmoil, the conflict at the India-Pakistan border is escalating, and the Russia-Ukraine war continues. There is also uncertainty in the domestic political environment in the United States, which may affect the direction of future economic policies.

Key to Wealth Preservation: Building a Resilient Investment Portfolio

In this environment, the primary goal of investment should not be to pursue the highest returns, but to ensure that assets can withstand extreme shocks. As a seasoned investor put it: "What truly determines your wealth's fate is not the average return, but whether you can avoid a 'zeroing out' moment."

Even if a portfolio achieves an average annual return of 15%, experiencing a single 80% collapse can make it difficult to recover. Therefore, it is crucial to build an investment structure that can survive in a storm.

Five Major Principles of Hedging Investments

1. Safe assets are not the same as low-volatility assets. A true safe-haven asset should be able to grow in value during a systemic collapse.

2. Beware of the adverse effects of compound interest. In extreme market conditions, compound interest can become the most destructive force.

3. Prepare for the worst-case scenario, rather than predicting the future. The focus is on building a portfolio that can handle multiple situations.

4. Seek convexity payoff structures. That is, assets that may incur slight losses or remain flat during normal times, but can yield multiple returns in extreme events.

5. Geographic and Custodial Diversification. The location and method of custody of assets are crucial for risk control.

Building a "Hedge Investment Portfolio"

A possible asset allocation plan is:

• 90-95% allocated to low-risk, stable return assets, such as short-term government bonds, cash, high-dividend stocks, etc.
• 5-10% allocated to high-leverage "tail risk hedging" assets, such as long volatility indices, deep out-of-the-money put options, precious metals, etc.

This structure may perform moderately during normal times, but it can provide effective protection during periods of significant market volatility.

"Black Swan Survival Portfolio" in 2025

In light of the current risk environment, the following layered asset allocation strategies can be adopted:

Basic Layer: Healthy Body

Maintain good physical condition and survival skills to prepare for various situations.

Layer 1: Anti-systemic risk assets ( -10% )

Including physical gold, cryptocurrency ( cold wallet storage ), overseas assets, etc., to cope with extreme systemic risks.

Second Layer: Tail Risk Hedge Assets ( 3-7% )

Including index deep put options, volatility index longs, gold call options, etc., used to obtain high returns during significant market fluctuations.

Third Layer: Liquidity and Growth Assets(70-90%)

Including short-term bond ETFs, global high-dividend stocks, emerging market real estate, etc., used to provide stable cash flow and long-term growth.

Conclusion

In an increasingly uncertain world, investors need to build a portfolio that can adapt to various situations. By strategically allocating different types of assets, we can prepare for future opportunities while protecting our capital. Remember, a good defense often leads to a good offense.