The Antifragile Portfolio: How to Protect Yourself From Losses Without Sacrificing Returns

10 min read
I
Wealth Strategies
Pontus Lagerberg
November 2, 2021

In this article we will cover an alternative wealth strategy that you can use to structure your portfolio to succeed in any financial climate.


With this strategy, you will be able to make money no matter whether the markets are going up, down, or sideways.


Additionally, you will set yourself up for the opportunity of making insane returns, without ever being in a situation where you could lose it all due to bad luck.


This strategy will set you up for long term wealth, and by being immune to the pitfalls of most portfolios, it will create dependable wealth not only for you but also for your future generations.


To achieve these seemingly opposite goals at the same time, we will throughout this article learn more about the philosophy of an antifragile portfolio, and how you can pull it off to set yourself up for happiness, success, and security. 

Why This Strategy Is Important

Sadly, most people with big ambitions of success fail to achieve their goals - not due to lacking skills, but due to not having an efficient financial strategy to handle their risk and set themselves up for success.


In fact, studies show that 90 % of people who start a business fails, and at least the same, if not more, lose money with trading.


Even for those who do succeed, poor money management practices routinely lead great fortunes to ruins.


Sooner or later, a financial foundation that isn’t built to withstand a great deal of financial pressure will fall.


In fact, studies show that if successful people don’t lose their fortunes within their lifetime, 70 % of them do so by the second generation, and 90 % by the third generation.


As is evident from this information, building long term wealth isn’t necessarily as contingent on maximizing gains, as it is on protecting and preserving wealth. 


However, protecting and preserving wealth is not as easy as it once was, and traditional savings and investing strategies are breaking down due to an increasing instability in the global economy.


With ever decreasing interest rates and a ramping inflation, traditional savings vehicles are no longer enough to protect your money and create compounded wealth growth. 


With excessive amounts of debt and capital in the financial markets, prices of stocks and other financial instruments have grown out of touch with reality, and is building up for a large correction. 


In short, there is a lot of hidden risk building up in our global economy, and in face of this it has never been more important to implement a system to manage your financial risk.


With the simple strategy that we will learn in this article, you will be able to build wealth in a way where you will never have to worry about financial demise, while still having the ability to make returns that could earn you an early retirement and the lifestyle you are dreaming of.

The Inspiration For The Strategy

This strategy takes inspiration from the books written by Nassim Taleb, such as Antifragile: Things that Gain From Disorder, Black Swan: The Impact of the Highly Improbable, and Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets.


Nassim Taleb is a statistician, risk expert, and former hedge fund manager who has made a name for himself with his unique view, understanding, and philosophy about risk, and the strategies he proposes to deal with uncertainty.


Throughout his career in finance, he has amongst other things used a strategy of taking large bets against crashes to great success, and has reportedly been financially independent since the crash of 1987. 


In fact, a hedge fund that Taleb advises recently made a 4,144 % return for their investors following the thinking of Taleb during the pandemic crash.


While the strategy presented in this article is an adaptation, and not an exact copy of Taleb’s thinking, it is based upon the same principles of not underestimating the risk of the unknown, and creating a balance between protection and opportunity. 

The Basic Structure of The Antifragile Portfolio

At the basis of this strategy are two elements - safe bets, with a low risk of failure, and high risk bets, with a larger risk of failure but larger potential reward.


Anything that is somewhere in the middle between a safe bet and a high risk bet, such as index investing, is not a part of this strategy.


This is because in general, these mainstream types of strategies aren’t providing you with enough return to make up for the risk they expose you to.


Instead, the antifragile portfolio keeps things simple by focusing on keeping a balance between safe bets, which will keep your portfolio stable and growing through anything, and high risk bets, which might lose you money but which could also make you huge returns. 


To make yourself immune to bad luck, it is important to always keep the majority, such as 80 %, of your wealth in safe bets, as this money will be allowed to grow on a compounded basis, protected from market volatility, taxes, litigation, and any other threats that might deplete your money.


With a safe basis, you can take a minority of your money, such as 20 %, and put it to work in high risk projects where you have a potential for large gains.


With this structure, the factor of risk and chance will be more favorable to you, and you will be able to make money no matter if the market is going up, down, or sideways, and no matter whether you are lucky or unlucky in your financial decisions.


In an upmarket, or when you are lucky with your high risk bets, the portion of your money that is dedicated to high risk bets will experience extreme growth, which you can reallocate to your safe bets to keep it safe for the future.


In a sideways market your safe bets will provide you with a stable performance that will support whatever performance your high risk bets can do.


In a downmarket, or when you are unlucky with your high risk bets, you will never lose more than the minority you have in your high risk bets, and will keep the majority of your money secure within your safe bet.


To summarize: in lucky times, your high-risk bets will yield you high returns, and in less lucky times, your safe bets will keep the majority of your money safe.


Taleb calls this strategy the Barbell Strategy.



With this structure, you will remain protected against unexpected, high-impact events in your personal affairs or in the world at large, while still having a chance at making outsized returns. 


For it to work, however, it is important that you choose the right bets, especially the safe bet, but also your high-risk bets, which is what we are going to look at next.

What is the Best Safe Bet?

The world of safe bets and savings vehicles have gone through enormous changes in the past 30 years. 


Increasing inflation and decreasing interest rates has led to the fact that virtually all traditional savings vehicles are now providing you with a lower return than inflation.


This means that keeping money at the bank, whether in cash, government bonds, or saving accounts will cause your money to lose purchasing power over time.


Beyond the fact that the yields of traditional savings vehicles can’t surpass inflation, they are also exposed to several other risks, such as taxes, litigation, and counterparty risk, which you can learn more about in this article.

  

One of the only vehicles that can still be considered a safe bet, however, is permanent life insurance, and especially whole life insurance, where you can get minimum guaranteed cash value growth of 4 % and actual returns of around 6 % today.

In fact, lawmakers considers permanent life insurance so important as a savings vehicle that they recently changed the laws to make it more efficient to save money in permanent life insurance policies, which you can learn more about in this article.


Whole life insurance is a less conventional savings vehicle that has been loved by the wealthy because of its stable financial performance as an asset class ever since the 1800s.


To illustrate this, let’s look at the hypothetical historical return of having $100 in a government bond versus in one of the whole life insurance policies that you can get through the White Swan digital platform.



In delivering returns much higher than other savings vehicles, it still remains a true safe bet, and provides its returns with a very low risk. 


Unlike traditional long term savings vehicles, permanent life insurance policies are liquid through yearly dividends and loans, which can be used to finance investment or lifestyle expenses.


Since you are guaranteed a minimum return, getting loans that use your whole life policy as a security are more secure than getting a mortgage, since there is no risk that the value of your policy will drop below the value of your loan, like there is with a mortgage.


Additionally, all permanent life insurance policies are protected against the risk of you being sued, as they are untouchable in litigation.


Further, permanent life insurance policies are protected from taxes, as gains within the policy are tax-free, and dividends and loans also can be tax-free, if done in the right way. 


For a slightly more aggressive safe bet, indexed life insurance policies can also be a good idea.


Instead of having minimum returns of 4 %, indexed policies usually only protect you against loss with a 0 % return guarantee, but provide you with returns that are correlated with a stock index, up to a certain cap, or maximum return.


While these policies are not the ultimate safe bets, as they can have years with 0 % return, they do offer an attractive alternative for those looking to include a slightly riskier safe bet in their portfolio.


To illustrate this, let’s look at the hypothetical historical return of having $100 in the S&P 500, both with and without being taxed, versus having it in one of the indexed life insurance policies that you can get through the White Swan digital platform.



As you can see, a pure index investment might yield higher returns over the short term, but as losses from market crashes get added into the mix, the indexed life insurance policies start taking the lead.


There is however more uncertainty in indexed life insurance policies, and the insurers that sell them generally work differently than the insurers that sells whole life insurance, which can be understood better in this article.


For this reason, and for the purpose of finding an ultra-secure safe bet for an antifragile portfolio, we primarily recommend whole life insurance.

What Are the Best High Risk Bets?

While there are only a few truly viable options for safe bets, there are far more options for high-risk bets.


In general, however, most high-risk bets are centered around two pillars - entrepreneurship, investing, and trading.

Entrepreneurship

If you don’t already have a lot of money, creating an innovative company can be one of the best ways to build large wealth in a relatively short amount of time.


Within the wide range of ways you could build wealth with entrepreneurship, there are many different levels of varying risk and reward, along with chance of success.


In general, any path you choose which has a higher chance of success will come with a lower potential gain, and any path with a lower chance of success will come with a higher potential gain.


It is important that you match your chances of success with your appetite for success, and only pursue the more difficult paths if you are truly hungry and ready to go through great challenges. 


Paths with a higher chance of success can include joining a company when it has already achieved some levels of success, or being involved in a business in a very established market, such as consulting. 


No matter who you decide to be an entrepreneur, the most important thing is that it is within an area that you enjoy and are good at.


Entrepreneurship is a subject much too broad for this article, but can be a valuable high risk bet that you can fit into your antifragile portfolio.

Investing and Trading

Just like with entrepreneurship, investing and trading also presents many potential paths with differing chances of success and potential gains. 


Buying and selling financial instruments can be a profitable endeavour, but it does generally require a great deal of skill.


Depending on your interests, aptitude, and available time, there are many different ways to do trading and investing.


If you have more time, you might want to consider day trading, but if you have less time, you could consider swing trading.


If you are technical, you could build algorithms to help you in your trading, but if you’re not, reading news and charts can work as well. 


If you want to invest in public markets you can, but if you prefer to invest in private markets and do angel investing or other private equity deals that can also be valuable.


Whatever you do, and whatever market you do it in, it is important to find an investing style that works for you, and to evolve your strategies over time to minimize risks and maximize profits.


Like entrepreneurship, investing and trading is a subject too broad for this article, but for the context of an antifragile portfolio, high risk trading and investing can be a valuable component. 


Bonus - Big Short Bets

A more advanced strategy for experienced traders is to use long term, far out of the money put options to make leveraged bets on crashes in different markets.


This is similar to the way Nassim Taleb made outsized gains on market crashes, as well as Michael Burry, who was the hedge fund manager of the fund Scion Capital, that was depicted in the movie The Big Short.


The way to pull off this strategy is to continuously keep rolling puts until a crash happens, which means that pursuing this strategy will for the most part imply a loss for years on end until a crash happens.


For this reason, this strategy is best executed at the late stages of an overextended bull market, and has to be managed to not have it accumulate too much loss.


It is possible to execute this strategy within any market where you can access a liquid options market, such as stocks, crypto, or commodities.


While it’s technically possible to do this strategy through a retail broker like Robinhood, it can be done more efficiently and at a larger scale through different over the counter markets - although unless you have some millions to invest, this might not be accessible to you. 

How to Maintain the Antifragile Portfolio

After dividing your portfolio between safe bets and high risk bets, it is important that you maintain that balance over time.


First of all, each time you get a paycheck, you should allocate as much of that paycheck as is feasible towards your antifragile portfolio.


When dividing that money up between safe bets and high risk bets, you could estimate what your current balance is between safe bets and high risk bets, and add money so that the percentage allocated to each becomes closer to what your target balance is.


However, if your high-risk bets are doing well, there is a chance that the balance between your safe bets and high risk bets can get out of balance from time to time.


To handle this, you could review your portfolio regularly at some interval, such as quarterly or annually, and if needed sell off a part of your high risk portfolio and increase your safe bet holdings, or vice versa.


Granted, keeping the weighting of safe bets to high risk bets will be easier to do the more liquid your high risk bets are (such as when your high risk bets are a derivatives portfolio), and harder to do the less liquid your high risk bets are (such as when your high risk bets are real estate or a non-public business). 


Additionally, the optimal balance between safe bets and high risk bets might change throughout your lifetime.


For example, if you are young and have less money, you might want to allocate more towards high risk bets, or if you are retired and just want to enjoy life, you might want to allocate all of your money towards safe bets.


While there is no need to keep a perfect balance between safe bets and high risk bets at all times, you should aim to do what you can to maintain a majority of your money in safe bets, and a minority of your money in high risk bets over time.  

Setting the Antifragile Portfolio up for Multi-Generational Wealth

By following this strategy throughout your life, you should be able to leave a sizable heritage for your children.


To ensure that the heritage is maintained and continuously growing for future generations, it can be meaningful to draft up portfolio allocations documents that stipulates what minimum balance of safe bets versus high risk bets are allowed, what constitutes an allowable safe bet or high risk bet, and so on.


With these high level rules for managing the family heritage, it will be easier to set your kids up for success and help them avoid the common demise of 2nd or 3rd generation wealth. 

In Conclusion

In this article, we have learnt about the principles of building an antifragile portfolio that can remain protected from unexpected financial stress while still having the ability to achieve outsized returns.


In essence, this portfolio strategy is all about:

  1. Keeping the majority of your money in extremely safe bets, such as permanent life insurance
  2. Keeping a minority of your money in high risk bets, such as trading or entrepreneurship
  3. Keeping none of your money in mid-risk bets, such as index investing


To pull this strategy off in the best way possible, get started with the best safe bet available by visiting our digital platform for permanent life insurance policies.


Our industry experts can help you find the perfect policy for your circumstances and our platform will make your experience as simple as you’ve come to expect from other online services.