Building a Safe Investment Portfolio to Address Extreme Events

The market is volatile, and the economic situation is complex and changeable. How can we protect and increase wealth in an uncertain environment? Renowned hedge fund manager Mark Spitznagel offers unique insights in his new work "Safe Haven."

Spitznagel believes that true wealth management is not about predicting the future, but rather designing an investment structure that can survive in any circumstance. He points out that both excessive risk-taking and being overly conservative can lead to long-term wealth loss. The key is to find the right balance.

The current global situation is complex, geopolitical risks are rising, and market volatility is intensifying. In such an environment, it is particularly important to build an investment portfolio that can withstand extreme risks.

Spitznagel proposed several core points:

1. Safe assets are not the same as low-volatility assets. True hedging assets are those that can grow in value in the event of a systemic collapse.

2. The magic of compound interest can backfire on investors in extreme cases. A significant loss can offset years of gains.

3. Do not try to predict the future, but be prepared for the worst-case scenario.

4. Look for assets with a convex payoff structure, which may incur slight losses during normal periods but can significantly rise during extreme events.

5. The geographical distribution and custody of assets are equally important. Do not concentrate all assets in one country or institution.

Based on these principles, the portfolio structure proposed by Spitznagel is:

• 90-95% allocate to low-risk stable assets, such as short-term government bonds, cash, high-dividend stocks, etc.
• Allocate 5-10% to high-leverage "tail risk" hedging positions, such as long VIX, deep out-of-the-money put options, etc.

This structure has moderate returns during normal times but can provide protection during significant market fluctuations.

For ordinary investors, the following multi-layered asset allocation strategies can be considered:

Layer 1: Self-custodied anti-systemic risk assets, such as physical gold, cryptocurrencies, etc., account for 5-10%.

Second layer: High leverage hedge positions, such as index put options and long VIX, account for 1-3%.

Third layer: Liquidity and growth assets, such as short-term bonds, global high-dividend stocks, etc., account for 50-60%.

Other configurable diversified assets such as real estate and foreign exchange.

Spitznagel's core point is: although we cannot predict or prevent the occurrence of crises, we can ensure that we do not collapse during a crisis through reasonable asset allocation. This defensive thinking is particularly important in turbulent times.