Tuesday, March 15, 2011

Black Swans and Asset Mix

Good article by Douglas Kass on the more frequent occurrence of Black Swans and the interlocking effect they have on the globalised world. Of particular note, the asset mix in this age of frequent high impact unknown unknowns. Do you want to be too concentrated in your holdings? Do you think Cash is an asset class to be treasured and appropriate raised in weight-age even if it pays pittance?

We can no longer turn the clock back to a simpler time. We must play the hand we are dealt. And our time is interconnected, interlinked and increasingly complex. And our hand has, at its core, a rising number of outlier or Black Swan events.  

Given the "newness" of these and other nontraditional and secular challenges as well as the greater frequency of Black Swan events, P/E multiples might be pressured and could even contract as a comparison between today's valuations to those of history can be expected to lose some of its significance and relevance. 

In this setting, a more conservative asset mix and higher cash position than normal seems to be a prudent strategy.
The full link for your perusal , A contagion of Black Swans.


Anonymous said...

Hi WJ,
"In this setting, a more conservative asset mix and higher cash position than normal seems to be a prudent strategy."

Definitely, i have post about people who are reaching 55 years old not to close their "CPFIS" accounts and withdraw their CPF money; which still at least gives you 2.5% p/a. People who reach 55 year-old can treat CPF account as a "special current banking account" which can be use for stand-reserve for any thing.

Singapore Man Of Leisure said...

How true.

I remember when I bought AIA policy, I was told that it's part of the big AIG group - very "safe".

Who would have expected a "safe" dividend and oil play like BP to be cut in halve? It's a big holding to UK pension funds....

I've also noticed interesting fear postings on investing in First Reit with exposure to Indonesia assets - earthquake prone area. But I've never read any
fear concerns on Parkway and Saizen reits with assets in Japan.... Selective perception or investor bias?

It's no fun to go 1/4 in cash this Dec 10 when the market keeps moving up and everyone so optimistic.

1/4 cash is my "insurance" for sudden downside risks; the profit forgone is insurance "payment".

Leant by failing and profiting from my past mistakes.