“Diversified Investments”
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When creating an asset portfolio, the basic principle, often referred to as the “foundation of foundations,” is diversified investment. However, there is no globally accepted standard for how diversified an investment should be.

Major banks and the like may have their recommended standards, but following them doesn’t guarantee that everything will always be okay. That can be stated with certainty.

The famous “All Seasons Strategy” recommended by Mr. Ray Dalio of Bridgewater for individual investors also seemed to have taken a significant hit with the bond market collapse starting from last year (2022).

Ray Dalio’s All Seasons Strategy for Individual Investors

Equities (S&P 500 and similar indexes) … 30%
Medium-term U.S. bonds (7-10 years maturity) … 15%
Long-term U.S. bonds (20-25 years maturity) … 40%
Gold … 7.5%
Commodities … 7.5%

It seems that this is the composition. The fact that bonds constitute 55% of the entire portfolio can be said to be a distinctive feature, but with this, 2022 would have been quite challenging.

However, I am not criticizing this All Seasons Strategy at all. On the contrary, now that the bond crash seems to have bottomed out (September 2023), it might be a portfolio ratio worth considering.

Also, since equities are kept at 30%, it should be somewhat resilient to shocks. In fact…

During the IT bubble burst in 2002, when the S&P 500 dropped by about -22%, this portfolio had a performance of around +7-8%.
During the Lehman Brothers shock in 2008, while the S&P 500 dropped by about -37%, the All Seasons Strategy was down by about -4%.

I came across this description. Even if these are theoretical values, it’s quite impressive.

Other Portfolios

For reference, looking at portfolios other than the one mentioned above. There were also those centered around stocks:

Stocks, corporate bonds, real estate (developed countries, developing countries, dollar-denominated, yen-denominated, other currencies) … 40~60%
Government bonds (U.S., Europe) & cash …10~30%
Commodities (gold, silver, platinum, Bitcoin, etc.)…20~40%

This is from Mr. Dan Takahashi, who is popular (?) on YouTube lately. It feels more aggressive compared to the All Seasons Strategy, fitting for a former Wall Street trader… or so I think, even though I don’t really know.

In unfavorable conditions, the strategy is to increase the ratio of government bonds and cash. Depending on the situation, these three ratios are adjusted.

Diversified Investments are for Risk Hedging

Returning to the main question, if we follow the All Seasons Strategy and divide into five categories, can we call it a diversified investment? Depending on what’s included, it seems to be diversified, at least to me.

So, the reason for diversifying investments would be to hedge risks, but does that mean that diversifying into five categories will hedge the risks? The answer to that question is “there’s a possibility”, depending on what’s included, but it’s not definite.

Firstly, the kind of economic shock will determine how much each asset will decrease, and in essence, what you hold, its proportion, and even where you live, among other personal conditions, will likely affect the answer.

Diversification for Risk Hedging Starts with Currency Diversification

I wrote “depending on where you live…” keeping in mind, for instance, those who live in authoritarian countries. But if you reside in a democratic nation that’s considered capitalistic, I’d personally recommend starting with currency diversification.

As of September 2023, the yen continues to weaken with seemingly unstoppable momentum. If you’re Japanese, I believe it’s advisable not just to rely on the yen but also to have an investment account in a bank or securities firm in other major currencies like the U.S. dollar and Euro. A portion of funds should be allocated and invested in these currencies.

In my case, I roughly maintain a distribution of 50% Euro, 40% Japanese Yen, and 10% U.S. Dollar. I’ve mentioned this in other posts, but I deeply regret not switching the ratios between the dollar and the yen when the yen was steadily weakening. If I had reduced it to around 20%, I might have felt a bit different.

Moreover, currently, I’m holding a significant cash ratio. This means I feel the daily depreciation of my yen holdings, and it’s indeed happening.

Choosing investment securities comes after diversifying currencies.

Diversifying Both Assets and Time is the Key

From there, diversify the investment targets, by category. Like the All Seasons Strategy mentioned earlier, diversify into stocks, bonds, commodities, etc. And even further, diversify across countries like Japan and the U.S., ensuring not to concentrate too much in one nation. In my case, I also include cryptocurrencies.

And then there’s time diversification, meaning setting up regular investments, such as buying a certain amount every month. This seems to be the commonly advocated way of diversified investing.

This means that the ways and combinations of diversification are virtually endless.

There isn’t an absolute right answer in determining where to invest. Yet, that’s why there’s no need to compare with others. It doesn’t matter what portfolios others are holding; as long as mine provides satisfactory returns, it’s good. Even so, finding that ideal portfolio isn’t easy, so looking at others’ choices becomes a form of study.

Diversification Among Countries is Essential

As of September 2023, when it comes to investments, most eyes turn to America. Considering market capitalization, just Apple alone equates to about 75% of Japan’s scale. Naturally, this U.S.-centric trend is unsurprising.

Looking at the large U.S. indices like the S&P 500, they have been consistently on an uptrend, making them impeccable candidates for long-term investments.

The current trend (or fad?) of index investing is predominantly U.S. stocks, essentially placing a bet on the future of the U.S. economy.

The era dominated by the U.S. seems to be persisting, and I personally believe that the U.S. economic growth will continue in the foreseeable future. However, I still feel that being overly focused solely on the U.S. isn’t a wise strategy.

Even from a technical perspective, like mine, which trades based on charts, the U.S. economy, hovering around 200% on the Buffett Indicator, feels quite precarious. Considering 100% is the average level, solely based on this index, U.S. stocks appear entirely overvalued, suggesting theoretically that half the current value might be more optimal.

Just the thought of the S&P 500 plummeting by 50% is both terrifying and, from a trader’s perspective, thrilling. But, as the old saying goes, “excesses are corrected,” it’s possible that such a scenario could eventually materialize. Whether this happens through a crash or gradually, the timing and speed remain uncertain.