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Let's get to the point. In the last episode of this series, we talked about how the attributes of assets can vary greatly. 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 certain means, but their 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 attribute characteristics into a portfolio to achieve the ultimate goal of making money?

• Let's use an analogy. Think about packing your luggage for a trip. The first thing you definitely need to consider is where you are going, right? If you are going to the freezing Harbin versus the always-sunny 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 a business trip, you might need to bring a suit and leather shoes. But if it's for tourism, then just bring whatever is comfortable.

  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 many research articles on asset allocation or marketing promotion articles, and see how these asset allocation big shots in the U.S. do it, it might not work well in China. Just to give a simple example, in the U.S., most people will allocate more than half of their 401K retirement accounts 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 in 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 only indicates 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 feed his family versus that of a sandwich generation with elderly parents and young children. You can imagine that they should definitely not be the same, right? Even if you are still a single man, 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 two adaptability requirements for the asset allocation structure we mainly want to discuss today.
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 things in your luggage that remain unchanged. For example, toiletries and change of underwear. Regardless of the market conditions or your needs, there will always be some things in your investment portfolio that can remain unchanged in the face of change. For instance, an emergency liquidity fund always needs liquidity management. Since we have now entered the practical phase, I won't elaborate on the conceptual aspects anymore. 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 have implemented, some are insights I have gained from discussions with friends, and some are summaries from the many books and materials I have read over the years related to asset allocation. I hope they can be helpful to everyone, so let's officially begin.

As mentioned earlier, there are two adaptability requirements.#

• 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 actually more obvious than that of internal factors. Just like before we travel, we will definitely check the temperature of our destination to decide what clothes to bring.
  When making allocations, we can easily think about what kind of macro market situation we are currently in.
  • For example, is the economy booming or undergoing structural transformation? Is the stock market in a bull market or a bear market? Once we have a clear understanding of these, we can proceed with the allocation, right?
  • So, 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 easy to understand.
    Because when we invest, we often subconsciously look at history, cycles, and past asset price changes to infer what will happen next, right? Because humans are creatures of experience. For example, recently Trump is about to take office. Even if we know that Trump 2.0 will definitely be very different from Trump 1.0, people will still inevitably flip through the calendar news from 2016 to 2020 to see what happened back then.
    The recent "Trump trade," especially in the U.S. market, is largely due to Wall Street institutional investors using their previous experiences to speculate on which assets might benefit from this presidential cycle and then buying in advance.

But speaking of this, you might notice a problem. Even if history really repeats itself completely, and Trump is indeed confused enough to repeat all the policies from his first term in his second term, the market has already preemptively laid out these assets, and their prices have already reacted in advance. Therefore, the trends in the next few years will definitely not be exactly the same as last time. This is actually what Soros often refers to as reflexivity, and it is also why we cannot simply seek 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, which requires insight into the patterns behind past data events. Being able to see far into the future is based on this insight to build a configuration that adapts to the current market environment. In other words, it is about seeing the essence through phenomena, clarifying the core logic and reasons behind similar appearances of the past and present, rather than simply looking at what happened and what kind of data was presented. Many friends might just look at the lines and K-line charts 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 look beyond these measures and news, an important background is that after the 2008 financial crisis, the U.S. started quantitative easing, which led to a more polarized wealth gap. Coupled with the global technological revolution, a situation of generational disconnect emerged. The economic pie could no longer be expanded, so it had to be redistributed. What did all these reasons lead to? They led to economic populism, political nationalism, and isolationism in foreign affairs. Trump is the embodiment of this. If everyone thinks this through and adds the group of people around him, then you should understand that in the next few years, the focus of the Trump administration is likely to be domestic rather than foreign. Whether it succeeds or not is another matter, but it will definitely focus on internal reforms rather than external hegemonic expansion. Even in terms of foreign affairs, its core is trade rather than military, and tariffs are just one of the means, not its ultimate goal.

Of course, these topics are quite broad, and I won't elaborate here. I have also been reading some materials on this recently, and if there is an opportunity, we can dedicate a separate episode to discuss it. I just want to express a meaning here, which is why everyone is now desperately reading history. It is because 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 own asset allocation structure? The first thing I think we should do is to abandon the impulse to change our investment portfolio drastically whenever there is a slight change in the wind. You have to believe that all those sudden news that appear on Douyin, social media, or even blogs can be ignored. Because all the 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 by 3% to 50% of your position.

The most likely beneficiaries will only be those brokers or financial institutions collecting fees. So once your luggage is packed, don’t keep moving it. Once our portfolio is built, no matter what happens, there is no reason for you to liquidate all your stocks overnight or make any major investment decisions or changes to your allocation structure without careful consideration and repeated deliberation. This reasoning is something everyone understands because it is our own money, and the decision you make may directly affect whether your money can generate more money for a long time in the future. But to say something heart-wrenching, we modern people may spend half an hour deciding where to eat or what takeout to order. Then we spend another ten minutes thinking about what kind of coupon to match. But when we make investment decisions, we often consider them for just a few minutes and send out orders as soon as we hear a piece of news.

For myself, how do I solve this impulse? I set a red line for myself. Speaking of which, I wonder if everyone still remembers a consumption-related formula I mentioned in the episode about why we can't save money, which is about how much money I should spend before I think about whether to spend it. The threshold I calculated is based on 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 messages saying that I don't apply this formula every time I consume.

But the value it ultimately calculated has invisibly set a threshold for me, increasing my resistance to spending. Just this point feels very useful. Here I can provide another resistance, which is targeted at the investment field. For me, if my investment decision, say buying a stock or buying 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’s 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 you think about it, if you invest 5% a month, that means 60% a year, which is already a very high turnover rate. Of course, in actual operations, 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 buying and selling investment decisions. Because from history and many experiences, excessive operations will definitely be a resistance 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. So where does the term adaptive investment portfolio come from? In fact, I borrowed this concept from Professor Shi Lei of Xiyin, who advocates creating a complex adaptive system. He even produced two podcast episodes specifically on this topic, and interested friends can listen to them. His blog is called "Shifen Shilei," and he has been someone I have followed for over a decade in the investment field, and he also has his own column in finance. If there is an opportunity, I would like to have a deep conversation with him. Because what he has always wanted to do, I think, is to localize Bridgewater's all-weather theory, for which he has created 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 actually quite similar to mine. But I must admit that for novice investors, even for many friends who have been investing for many years, his system's understanding and cognitive threshold are too high. It is actually more suitable for institutional investors.

Including 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 will 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 our investment portfolio is an ecosystem. What kind of ecosystem is relatively 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 should not be too singular, 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 is all stocks or all bonds, it is not a suitable investment portfolio. No matter how attractive or promising you think a certain investment type 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 have the characteristic of adaptability 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 enters a warm period, the organisms in that ecosystem may likely die from the heat. Therefore, the ecosystem must have a certain level of adaptability and elasticity, allowing it to evolve towards adapting to the new environment. 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 from a few years ago is very different from the current environment, even if the U.S. lowers interest rates again. I believe no one would predict that rates would return to zero, right? At least at this stage. This level, which has been referred to as a higher interest rate environment and higher inflation level since last year, is likely to be very different. However, if your portfolio previously included a lot of private equity funds in the primary market, then the term is at least 8 to 10 years, or later we have many five-year closed-end funds in public funds, then it will become very inelastic. Even if you realize that the macro environment has undergone significant changes, it will be very 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, thinking 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 this case, your portfolio will actually lose a lot of elasticity. If the market enters a new stage next and new opportunities arise, or even higher interest rates appear, you will find that you cannot adjust this portfolio. Therefore, we ordinary people often cannot see trends clearly and cannot see far into the future. So what should we do? At least leaving some elasticity and liquidity in our portfolios is much better than fully loading the ship and locking in long terms.

Having said so much,

If I were 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 you are working, entertaining, or interacting with others, we actually 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. But when it comes to investing, it seems that we easily forget this principle. People who are not economists often try to guess what stage an economic cycle is in, while those who have little understanding of politics want to invest according to policy directions. Clearly, these are not our strengths, but because we live in an information society where a lot of intelligence and information is readily available, it makes us 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 things we are not good at. For example, trying to guess where the bottom of the cycle is or whether I can catch 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, which was titled "How Much Money Should You Consider for Asset Allocation," I mentioned this point. 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 make it into 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 investment purpose. What are the two ends of this axis? 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 allow it to lose money, and its liquidity must be very good. So I need to make some absolutely risk-free short-term investments.

The other end may be the most long-term and aggressive goal 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 that their next generation can live without worries. All these goals will appear somewhere on this axis.

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

For example, to beat inflation, or to achieve temporary freedom, etc. The key is that only by clarifying your investment purpose can we take the next step. Knowing which allocations suit you and how to find them? You need to look at 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 varieties within your cognitive range is very important, as we discussed in the episode about building a weaponry. If a certain investment variety 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 varieties 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 treating Xueqiu as their investment weapon. I mentioned in that 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 varieties outside the cognitive boundary. 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 when you have personally experienced the ups and downs of the market like a roller coaster can you know at which point you will feel uneasy, unable to sleep well, 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 cognitive boundary and risk tolerance boundary, we can actually draw the coordinate axis of what we can accept. The far left of this axis is our comfort zone, and everyone's comfort zone may include things like Yu'ebao, savings, or even short-term bond funds within this range. And at 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, derivatives, etc., they are more likely to be positioned on the right side.

• Now that we have two axes, we can merge them to get a quadrant chart, right? All asset varieties can actually scatter in various corners of this chart. So where should we place the largest position in our asset structure? Everyone can imagine that it must be placed in the area that best meets your purpose and is also within the range you can accept. However, because everyone has a different chart in their mind, I cannot generalize here. I will still take myself as an example. Because my most important asset allocation goal right now is to create a passive income portfolio. I want this cash flow, whether from dividends or interest, to cover my living expenses, rather than to greatly increase the value of my investment portfolio or achieve class mobility, etc.

On the other hand, the boundary I can accept is basically individual stocks, while futures and options are somewhat beyond my cognitive and risk tolerance boundaries. And cryptocurrencies are also typically beyond my cognitive boundary. So once this matter is framed, I can basically determine which varieties I should invest in.

Of course, in addition to this range, we can also appropriately include some varieties that meet my investment purpose but are still beyond my acceptance or cognitive level. The main purpose is to gradually expand my weaponry and capability circle. However, for such varieties, the amount of funds you should allocate should be smaller. As for the varieties in 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 was about how much money you should consider for asset allocation, I provided some specific combination suggestions for friends of different age groups and life situations. If everyone combines this episode's content with the previous episodes, and then re-listens to some of the combination suggestions I mentioned 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,

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