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Let's get to the point. In the previous episode of this series, we discussed that the attributes of assets can vary widely. There are stocks that have average safety but excellent profitability and liquidity, as well as deposits, including large certificates of deposit, that have good safety and can enhance liquidity through various means, but whose profitability is increasingly poor. Of course, there are also scarce assets that can break the so-called impossible triangle but are hard to come by. So how can we bundle these assets with different attributes into a portfolio to achieve the ultimate goal of making money?

• Let's use an analogy. Think about packing for a trip; the first thing you need to consider is where you are going, right? If you are going to the freezing Harbin versus the eternally warm Thailand, the things you need to bring will definitely be very different. Secondly, you also need to think about your purpose for going. If it's for a business trip, you might need to bring a suit and dress shoes. But if it's for leisure, then comfort is the priority.

  Important

  In fact, asset allocation works the same way. For example, the asset allocation of Americans is likely different from that of Chinese people because the economic development stages and financial market conditions of these two countries are quite different. If you look at the asset allocation strategies of American experts according to many current research articles and market promotion materials, you might find them unsuitable for our context. For instance, in American retirement accounts, most people allocate more than half to stocks, especially domestic stocks. But if you are in China and try to set up a pension account and allocate in the same way, at least over the past decade, you wouldn't have made much money, certainly not as much as if you had bought a house ten years ago. Does this mean that the Chinese market is bad? I don't think so; it just shows that our two countries have indeed been in different development environments over the past ten years. Another example is the asset allocation of a single man who can afford to feed his family versus that of a sandwich generation with both elderly and children; you can imagine they should definitely not be the same, right? Even during the single period, if you have already bought a house and have a mortgage versus being debt-free, the focus of your investment portfolio should also be very different.

This is the main topic we want to discuss today: the two adaptive requirements of asset allocation structure.
One is to adapt to the current market environment, and the other is to adapt to one's own life situation. Of course, just like no matter where you go, there are always some essentials that remain unchanged, such as toiletries and clean underwear. Regardless of market conditions or your needs, there will always be some elements in your investment portfolio that can remain constant in the face of change. For example, an emergency liquidity fund is always necessary for liquidity management. Since we have now entered the practical phase, I won't elaborate on these conceptual aspects anymore. Instead, I will directly discuss several principles that I believe are very important when deciding on your asset allocation structure. Some of these are practices I follow, some come from discussions with friends around me, and some are summarized from the many books and materials related to asset allocation I have read over the years. I hope they can be helpful to everyone, so let's officially begin.

As mentioned earlier, there are two adaptabilities.#

• The first adaptability is to adapt to the current market environment, which is essentially about adapting to external factors. After all, the impact of external factors on our investment portfolio is often more apparent than that of internal factors. Just like before traveling, we will definitely check the temperature of our destination to decide what clothes to bring.
  When making allocations, we can easily think about the current macro market situation we are in.
  • For example, is the economy booming or undergoing structural transformation? Is the stock market in a bull or bear phase? Once we understand these clearly, we can proceed with our allocations, right?
  • The principle corresponding to this adaptability is what I call "the farther back you can see the past, the farther forward you can see the future."
    This phrase sounds a bit mystical, but it is actually quite understandable.
    Because when we invest, we often subconsciously look at history, cycles, and past asset price changes to infer what might happen next, right? After all, humans are creatures of experience. For instance, if Trump is about to take office, even if we know that Trump 2.0 will be very different from Trump 1.0, people will still inevitably flip through the news from 2016 to 2020 to see what actually happened back then.
    The recent "Trump trade," especially in the U.S. market, is largely driven by Wall Street institutional investors using past experiences to predict which assets might benefit from Trump's presidential cycle and buying in advance.

But at this point, you might notice some issues. Even if history does repeat itself, and Trump really is confused enough to repeat all the policies from his first term, the market has already anticipated these assets and their prices have already reacted in advance. Therefore, the trends in the next few years certainly cannot be exactly the same as last time. This is what Soros often refers to as reflexivity, and it is also why we cannot simply seek to find a sword by carving a boat, making investment allocations entirely based on past situations.

What does it mean that "the farther back you can see the past, the farther forward you can see the future"? In asset allocation, being able to see far back into the past means having a deep understanding of history, being able to discern the patterns behind past data and events. Seeing far into the future is based on this insight, allowing you to build a portfolio that adapts to the current market environment. In other words, it is about seeing the essence through the phenomenon, understanding the core logic and reasons behind similar appearances in the past and present, rather than simply looking at what has happened and what kind of data is presented. Many friends might just look at the charts and K-line graphs and think they understand history.

If we take Trump as an example again, we know that the keywords of his first term were tariffs, decoupling, trade conflicts, and the return of manufacturing. But if we peel away the shell of these actions and news, an important background is that after the 2008 financial crisis, the U.S. began a quantitative easing policy that opened Pandora's box, leading to a more polarized wealth gap. Coupled with the global technological revolution, a situation of intergenerational disconnect emerged. The economic pie could no longer grow, so it had to be redistributed. What did all these reasons lead to? They brought about economic populism, political nationalism, and isolationism in foreign affairs. Trump is the embodiment of this phenomenon. If everyone understands this, and combines it with the group of people around him, then you should understand that in the coming years, the focus of the Trump administration will likely be inward rather than outward. Whether it succeeds or not is another matter, but it will definitely prioritize internal reforms over external hegemonic expansion. Even in foreign affairs, the core will be trade rather than military, and tariffs are just one means, not the ultimate goal.

Of course, these topics are quite broad, and I won't elaborate further here. I've also been reading some materials on this recently, and if given the opportunity, we can dedicate a separate episode to discuss it. I'm just trying to express one meaning: why everyone is now desperately reading history is that the depth of understanding history will determine your insight into future changes.

So you might ask, as an ordinary person, we really don't have the ability to understand history deeply, what should we do? How can we truly apply the principle mentioned earlier to adjust our asset allocation structure? The first thing I think we need to do is to abandon the impulse to change our investment portfolio drastically every time there is a slight change in the wind. You have to believe that all those sudden news on Douyin, social media, or even blogs can be ignored. Because all the significant changes that deserve our attention and require adjustments to our asset allocation structure will not happen overnight; they will definitely occur slowly and independently of human will. Even if there are many signs, it requires a deep understanding of history and current events to see clearly. So if you find that your asset allocation is influenced by these messages and you want to change it three or four times a year, and each time you want to change 3% to 50% of your positions, the most likely beneficiaries will only be those brokers or financial institutions collecting fees. So once your bags are packed, don’t keep moving them around. Once our portfolio is built, no matter what happens, there is no reason for you to liquidate all your stocks overnight or make any significant investment decisions or changes in allocation before careful consideration and repeated deliberation. This principle is something everyone understands because it is our own money, and the decisions you make may directly affect whether your money can generate more money for a long time in the future. But to put it bluntly, we modern people may spend half an hour deciding where to eat or what takeout to order, and spend another ten minutes figuring out what kind of coupons to use. But when it comes to investment decisions, we often only take a few minutes to consider, and upon hearing a piece of news, we send out an order.

For myself, how do I solve this impulse? I set a red line for myself. Speaking of this, I wonder if everyone remembers that in the episode about why we can't save money, I talked about a consumption-related formula: I think about whether to spend money based on how much I spend above a certain threshold. I calculated this threshold using a formula related to my own assets and income. After that episode was released, it sparked a lot of discussions among friends. Some friends later left me messages saying that I don't apply this formula every time I consume.

However, the value calculated from this formula has invisibly set a threshold for me, increasing my resistance to spending. Just this point alone has been very useful. Here, I can provide another resistance, which is aimed at the investment field. For me, if my investment decision, say buying a stock or purchasing an insurance policy, or even making a fixed deposit, reaches 1% of my total liquid assets, I will force myself to set a one-day cooling-off period. If it reaches 2%, then it’s two days, and so on. In addition, because I also do investment account reviews, I will stipulate that my investment behavior each month cannot exceed 5% of my liquid assets.

Because if you think about it, 5% a month means 60% a year, which is already a very high turnover rate. Of course, in practice, I calculated that my annual investment portfolio adjustments over the past few years have not exceeded 20%. That is to say, about 5% per quarter, rather than every month. This is what I feel is a relatively comfortable turnover rate, but it may not be suitable for everyone. However, the above red line can help us avoid many unnecessary adjustments to our asset structure or some trading decisions. Because from history and many experiences, excessive operations will definitely be a hindrance to everyone's returns, not a driving force.

The second thing to do is to create an adaptive investment portfolio based on the principle mentioned earlier. Where does the term adaptive come from? In fact, I borrowed it from Teacher Shi Lei of Xiyin, who advocates creating a complex adaptive system. He has even released two podcast episodes on this, and interested friends can listen to them. His blog is called "Shifen Shilei," and he has been a figure in the investment world that I have followed for over a decade. He has his own column in finance. If given the opportunity, I would also like to have an in-depth conversation with him. What he has been trying to do, I think, is to localize Bridgewater's all-weather theory, creating many concepts and indicators to detect the current market environment and build an asset allocation portfolio that matches it. His entire set of ideas is quite similar to mine. However, I must admit that for novice investors, and even many friends who have been investing for years, his system's understanding and cognitive threshold are too high. It is actually more suitable for institutional investors.

After listening to the two episodes I just introduced, I believe most friends still do not know how to create this so-called complex adaptive system and may feel somewhat confused. So here, I will try to simplify it and add some of my own understanding to make it more practical. Let's imagine that your investment portfolio is an ecosystem. What kind of ecosystem is resilient and not easily destroyed by extreme weather or external factors? You might easily think that this ecosystem should have as many species as possible and not be too homogeneous, right? A single species is very fragile. Similarly, an investment portfolio composed of a single strategy and a single asset is also very fragile. For example, if it consists entirely of stocks or entirely of bonds, it is not a suitable investment portfolio. No matter how attractive or promising you think a certain type of investment is, you should not put all your funds into it.

Regarding this point,

In addition to this, as I mentioned, an ecosystem should not only be rich but also possess resilience to adapt to the current environment. For example, an ecosystem during an ice age should be relatively cold-resistant, right? But if you evolve entirely towards cold resistance, once the ice age ends and a warm period begins, the organisms in that ecosystem may die from overheating. Therefore, the ecosystem must have a certain degree of adaptability and resilience, allowing it to evolve towards adapting to new environments. The same applies to investment portfolios; they should also possess a certain degree of elasticity.

For example, an investment portfolio in a zero-interest environment a few years ago is very different from the current situation, even if the U.S. lowers interest rates again, I believe no one will predict it will drop back to zero, right? At least at this stage. This level, which we have been talking about since last year, is a relatively high interest rate environment with high inflation levels. Such an investment portfolio is likely to be very different. However, if your portfolio previously included a lot of private equity funds in the primary market, then the duration is often at least 8 to 10 years, or later we have many five-year closed-end funds in public offerings, then it will become very inelastic. Even if you realize that the macro environment has changed significantly, it will be difficult to move.

Similarly, if you have bought a lot of insurance now, or even if I have friends who have bought a lot of 30-year U.S. Treasury bonds in addition to insurance, believing that the current interest rate level is relatively high, then it is suitable to lock in a high interest rate. This view itself is not wrong, but in doing so, your portfolio will lose a lot of elasticity. If the market enters a new phase next, presenting new opportunities, or even higher interest rates, you will find it impossible to adjust this portfolio. Therefore, many ordinary people often cannot see the trends clearly and cannot foresee the distant future. So what should we do? At least leaving some elasticity and liquidity in our portfolios is much better than fully loading the ship, filling the bottom warehouse, and locking in the duration for a long time.

Having said so much,

To summarize,

What is this principle called? It is called doing what you are good at and avoiding what you are not good at. This sounds like a cliché, but in life, we understand this principle very well. Whether in work, entertainment, or social interactions, we always strive to find things we are good at or interested in doing. And for things that are obviously not our strengths, we usually choose to avoid them. However, when it comes to investing, we seem to easily forget this principle. Those who are not economists often try to guess what stage an economic cycle is in, while those who have only a superficial understanding of politics want to invest according to policy directions. Clearly, these are not our strengths, but because we live in an information society with a lot of intelligence and information readily available, we make ourselves feel like we understand everything and can use it to make money.

So what does this principle actually say?
When determining our asset structure, we must return to our original intention and avoid those we are not good at. For example, guessing where the bottom of the cycle is or whether I can grasp the next market hotspot, rather than doing what we are good at. For instance, considering what my investment goals are and what I really need. I still remember in the first episode of this series, titled "When Should You Consider Asset Allocation," I mentioned this viewpoint. That is, the prerequisite for taking the first step in asset allocation is to recognize yourself. Now this is a callback.

However, in this episode, I want to further refine the concept of recognizing oneself. If we were to create a coordinate axis, then the two axes should be what you need and what you can accept. For what you need, this axis represents the ends of investment goals. One end is likely pure liquidity management. For example, if I have some money that I may need to use soon, whether for buying a house or paying tuition, I cannot afford to lose it, and its liquidity must be very good. Therefore, I need to make some absolutely risk-free short-term investments.

The other end may be the most long-term and aggressive goals for ourselves. This varies from person to person. For some, it may be to retire within ten years and achieve FIRE. Others may want to continue working but hope their next generation can live without worries, etc. These goals will appear somewhere along this axis.

In the middle of this axis, there are various investment objectives.

For example, beating inflation, or achieving temporary freedom, etc. The key is that only by clarifying your investment objectives can you take the next step. Knowing which allocations suit you and how to find them depends on the other axis. The other axis is what you can accept, which includes two aspects: the boundary of cognition and the boundary of risk tolerance.

In fact, choosing investment products within your cognitive range is very important, as we discussed in the episode about building a weaponry. If a certain investment product is completely outside your weaponry, then rushing to try it out, or even taking a large position, is likely to hurt yourself. For example, I increasingly feel that investment products like derivatives are somewhat beyond my cognitive boundary. Although I am still trying hard to learn, I know that I will most likely not use it as my main weapon.

Recently, many friends have been using Xueqiu as their investment weapon. I mentioned this in my episode about Xueqiu. In fact, many friends have been misled, either by salespeople or by their own cognitive constraints, and they do not understand the underlying logic of Xueqiu at all. This actually falls into the category of investment products outside their cognitive boundaries. The risk tolerance boundary is actually a more abstract concept because we often do not know how much investment risk we can bear.

This is not a questionnaire where they ask you some hypothetical stories or cases to really measure it. Only by personally experiencing the ups and downs of the market, like a roller coaster, can you know at which point you will feel uneasy, unable to sleep, or even restless. That is when you have exceeded your risk tolerance boundary. It does require a gradual trial to figure it out.

• With the boundaries of cognition and risk tolerance, we can actually draw the coordinate axis of what we can accept. The far left of this axis is our comfort zone, which for everyone may include things like Yu'ebao, savings, or even short-term bond funds. The far right of this axis is the so-called danger zone. Whether it is the Hong Kong stocks we discussed in the last episode, which are like a tropical rainforest, or various options, futures, and derivatives, they are more likely to be positioned on the right side.

• Now that we have two axes, we can combine them to obtain a quadrant chart, right? All asset types can actually be scattered in various corners of this chart. So where should we place the largest positions in our asset structure? You can imagine that it should definitely be placed in the area that best meets your objectives and is within the range you can accept. However, since everyone has a different chart in their minds, I cannot generalize here. I will still take myself as an example. Because my most important asset allocation objective right now is to create a passive income portfolio. I want this cash flow, whether from dividends or interest, to cover my living costs, rather than aiming for significant appreciation of my investment portfolio or achieving class mobility.

On the other hand, my acceptable boundary is basically individual stocks and futures options. As mentioned earlier, these are somewhat beyond my cognitive and risk tolerance boundaries. As for cryptocurrencies, they are typically well beyond my cognitive boundaries. Therefore, once this matter is framed, I can basically determine which types of products I should invest in.

Of course, in addition to this range, we can also appropriately include some products that meet my investment objectives but are also in areas where my acceptance or cognition has not yet reached. The main purpose is to gradually expand my weaponry and capability circle. However, for such products, the amount of funds you should allocate should be smaller. As for the remaining quadrants and areas, you should not allocate any funds.

What I just mentioned may still be a bit abstract, but in the first episode of this series, which discussed how much money is needed to consider asset allocation, I provided some specific portfolio suggestions for friends in different age groups and life situations. If you combine this episode's content with the previous ones and listen back to some of the portfolio suggestions I made at that time, you may have some different feelings. Well, that’s all for the content I wanted to discuss in this episode.

To summarize briefly,

Lastly, I want to remind everyone that in the small program "Red Rocket," there are developers cheering for it, and special red envelopes prepared for the listeners of the banquet guests. Interested friends can go and claim them, and also try out this index investment tool.