Making Money in a World of Zombies: A Novel Solution to Investing

Yesterday I talked about how governments and central banks were distorting the foundations of our economic system.

How they’re picking winners in the most brazen of ways.

Namely, by printing out money and doling it out to their chosen cliques.

As a consequence, they’re creating a legion of zombie investments. Assets that should be dead — or at least falling in value — but aren’t, because of this government intervention in the money supply.

I concluded with the thought that I couldn’t see how such a world could last too long. It’s against all that makes true capitalism — with its forces of creative destruction, risk and reward — work.

And yet, it’s the world you live in right now…

This juxtaposition can be hard for many investors to deal with.

You either freeze with fear and do nothing. Perhaps you — quite literally — put your money under the mattress?

(Not such a crazy thing to do in a coming world of negative interest rates on bank deposits!)

Or maybe you’re sick to death of hearing from the doomsayers with their economic tinfoil hats on? And conclude that if the sun is shining hay must be made…

In a way I agree with both responses.

Because here’s the thing…

Keeping an eye on the deep economic issues at play, while still sniffing out investing opportunity, aren’t mutually exclusive activities.

You can believe both things are real.

That the world is crazy and yet understand there’s money to be made in such craziness.

After all, as Keynes once famously said: ‘The market can remain irrational longer than you can stay solvent.

Meaning, if you stubbornly stick to a long-term viewpoint, you can end up being right, but still lose money.

A fact many market bears find out to their cost…

So today, I wanted to give you a novel way to invest in this strange world.

I must warn you up front, it’s an unconventional idea and not one you’re likely to hear from the mainstream advice industry.

But as a Money Morning reader, that should excite you, not scare you…!

Let me explain further…

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From the depths of a crisis

The strategy I’m going to explain to you today, is actually something I first hit upon back in 2008 when I was a financial advisor.

As you’ll probably remember, in 2008 the GFC hit hard and most investment portfolios were falling.

Some clients were desperate to get out the markets no matter what. They couldn’t stand the emotional pain of seeing their investments fall.

But for most we’d already positioned their portfolio to deal with such falls, so it was simply a case of restating the original strategy.

A soothing of the nerves conversation as it were…

The hardest clients to deal with were those who were adamant they wanted out of their entire share exposure, but you knew this was the wrong thing for them to do so.

They were people who had stated they were long-term investors previously, but now wanted to react like short-term traders.

In other words, an emotionally-led decision. Try as I might, I couldn’t budge the thinking of some of them.

So, I hit upon a novel solution…

The ‘extreme’ barbell portfolio

I asked these types of client what their biggest fear going forward was. The answer of course was losing more money.

I then asked them, if I could structure their portfolio in a way so that the worst-case outcome in five years was they would have the same balance as today — with the chance of having a lot higher balance — would they accept that compromise?

Most said they would accept that outcome (as opposed to going 100% into cash and just earning interest).

So that’s what I did…

To do this I structured their portfolio using a combination of long-term A+ rated bonds and bank-guaranteed term deposits.

This part of the portfolio represented around 70–80% of the person’s portfolio and was designed to ensure the interest payments would be enough to protect against further capital loss on the entire portfolio.

The remaining 20–30% was invested in a range of high-growth share funds. From geared shares to emerging markets, to small-cap funds.

The idea here was that this very risky range of funds would potentially provide huge returns and in turn lift the returns of the overall portfolio.

It turns out its an idea the famous trader Nassim Taleb also uses:

Money Morning

Source: US Global Investors

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His thinking is that you want to protect yourself from negative ‘black swan’ events — unlikely events with severe consequences.

While still exposing yourself to positive black swan events — unlikely events with hugely positive financial results.

Now as you know, the world economy recovered from the GFC and my cohort of fearful investors made some nice returns from this strategy.

But importantly they did it in a way that made them feel comfortable, even if I was wrong and the markets didn’t recover.

I think this kind of thinking is a potential strategy for you to consider today.

How you construct your portfolio is up to you of course. What you consider safe these days is up for debate too, I suppose. But ‘safe assets’ can be things such as a secure job — or a long-term annuity if you’re retired — and the steady income stream it brings too.

And the risky side of the equation has changed a bit too since 2008.

For example, I’d point you to the immense opportunity in cryptocurrencies like Bitcoin [BTC]. Sure, it could go to zero, but it’s an asset with extreme upside potential too. The very definition of a positive black swan event.

So, as part of an ‘extreme’ barbell strategy, it could be a very useful asset.

And a super interesting one too. Just like with small-cap stocks, half the fun is in the stories such investments bring.

Which, for me, is another reason I love investing and trading assets like cryptos and small-cap stocks. They’re just more fun!

And life — investing life too — should be fun.

After all, as Keynes also famously said: ‘In the long run, we’re all dead!

Don’t become a zombie investor too soon, I say!

Good investing,

Ryan Dinse,
Editor, Money Morning

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Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

Money Morning Australia