Macro Minute: Week of January 19, 2026
This week, I would like to go back to the foundation of my portfolio construction and allocation thought process. A great starting point would be the book written by Charles Gave. Charles has a longtime knowledge of financial history and markets and his book, The General Theory of Portfolio Construction, is a free download on Gavekal’s website here https://web.gavekal.com/books/the-general-theory-of-portfolio-construction/. The biggest takeaway for me is the four-quadrant model that he introduces. In it he overlays macroeconomic backdrops of rising or falling inflation with rising or falling growth. With these two variables he shows it is possible to know which types of assets should do best.
Next, I like to examine when the two classic portfolio allocations, stocks and bonds, perform poorly. This is primarily when inflation is high and rising. What can help add security to a portfolio in that environment? I have found that throughout history, real assets and trend assets have done an excellent job protecting portfolios during those times. Here are two papers supporting those facts – one by AQR https://www.aqr.com/Insights/Research/White-Papers/When-Stock-Bond-Diversification-Fails and one by the Man Group https://www.man.com/insights/trend-following-in-inflationary-environments.
Armed with this knowledge, I developed a portfolio that is driven mainly by equity returns but has exposure to fixed income for when economic activity is slowing and inflation is low. I combine that with exposure to real assets and trend for times when inflation is high and rising. Having a portfolio that is balanced to a wide range of outcomes smooths volatility and allows an investor to stay invested while other participants are panicking.
Another concept that I have hijacked from AQR is the concept of “sin a little”. In AQR’s paper here, https://www.aqr.com/Insights/Research/Journal-Article/Market-Timing-Sin-a-Little, they talk about how diverging from a long-term allocation, aka market timing, is a sin. However, when certain circumstances align, it can be prudent to shift your long-term allocations to tilt toward opportunities or away from potential problems. This is sinning a little. Sometimes I will sin a bit with the allocations when I feel it is prudent. An example of sinning a little is how I am currently underweighting bonds and overweighting real assets and trend. This is because I feel that with the current global expansion, driven by loose monetary and fiscal policies, real assets and trend will better diversify equity exposure.
I like to reexamine these foundational assumptions from time to time to make sure that I still feel confident in its reasoning. I still feel confident that this portfolio does well over long periods of time navigating different environments and dampening down volatility.
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