Black Swans

It seems that “black swans” (Nassim Taleb) do appear more frequently than in the past (financial crisis, Corona). Since our time is getting faster and faster, this should not be as surprising as the fact that such events are not supposed to be predictable. Taleb himself has pointed out that it is not only virologists who have been pointing out the dangers of epidemics for decades. During the financial crisis, “insiders” deliberately ignored the possible consequences of CDO deals, and the majority did not care about the stability of historical data.

Whether predictable or not, the possibility of such an event should always be considered. The simplest and most elegant way to do this is at the asset allocation level, where the percentage allocation of available money to the various asset classes is made. This is where the possibilities of influencing the result to be achieved (performance) are greatest.


Asset Allocation

The KYC (know your client/customer) prescribed by the regulatory authority is the basis of every asset allocation, but unfortunately all too often it is only carried out pro forma. The standardized form with multiple-choice answer options may be a good reference, but it is not enough to really capture the important soft factors. In addition, many answers are/must still be clarified in conversation or their effects must be shown. Most important are those that deal with risks.

Usually, the KYC is the basis for the allocation to asset classes, with equities and bonds taking up the most money. An alternative investment category includes everything else unless they are mentioned by name (real estate, hedge funds, precious metals, commodities, etc.). The degree of risk determines the weighting of equities and bonds, and client experience or diversification determines whether alternative investments are considered. The investment category money market (liquidity, cash) comprises the money that has not been invested elsewhere and its share is therefore rather random.


Money Market

There is a lot to be said for the fact that the share of liquid assets is determined first, and all other investment categories are only funded with the remaining balance. This deliberate reversal of the usual procedure may be incomprehensible at first glance, but it certainly has its merits. The intention is to lose less money when the financial markets are weak and (hopefully) to earn more when they are strong. Not losing money is at least as important for the average customer as making money. Since the right asset allocation is responsible for the bulk of performance, a neutral starting position (liquidity) is certainly not wrong. It also creates a reserve that can be used in case of changes without having to make any prior shifts.

The implementation of this type of asset allocation is relatively simple. At regular intervals, e.g. once a year, it is decided based on macroeconomic data and market indications whether the markets will trend upwards or downwards over the next 12 months. The percentage probability of an upward movement corresponds to the proportion of money to be invested and vice versa. A base position of 5-10% is always recommended. It covers possible transaction costs and forms an iron reserve. It goes without saying that massive price movements must result in a reassessment.


Food for Thought

The question is whether rigid bandwidths for shares and bonds really make sense, as they are based on historical experience that is no longer necessarily valid. The empirical experience that the performance of stocks over time is better than that of bonds may well be true, but “over time” is hardly justifiable, especially in our time. John Maynard Keynes once said: “In the long run, we are all dead. It is also noticeable that the difference between the risk taken (equity exposure) is relatively small for the various client categories and that this risk usually only affects the market (index ETF). A portfolio of individual shares may well have less risk. Finally, the deterioration in creditworthiness (ratings) seems to be hardly considered in the case of bonds.



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Christian Wagner
Financial Advisor