Master of None

Four years ago, I wrote about something called the Family Office Strategy: basically, how to invest like you’re managing a university endowment or a billionaire’s money, even if you’re decidedly not a billionaire. The principles I outlined then still hold up. What’s been fascinating to watch is how the stock market just kept roaring higher, making even the less conservative diversification strategies look somewhat silly in hindsight.

But here’s the thing about hindsight: it’s a terrible investment strategy. I was a believer in diversification then, and I am still today.

In particular for the “stay rich” crowd, the ones who already have the money. I’ve talked to people across the spectrum: wealthy, rich, ultra-rich. And here’s the thing that always surprises me: so many of them just hold a stocks-and-bonds portfolio. Even when they’re working with an advisor. That makes sense. Stocks and bonds are simple. If you keep costs low, it’s hard to mess up too badly. You don’t need complexity. (Though I do love Roger Nusbaum’s idea of “simplicity, hedged with a little complexity.”)

But here’s what’s telling: many of these wealthy individuals came to me specifically because they were interested in more complex products. Their financial advisors, the professionals they’re paying substantial fees, had never even mentioned alternatives to the basic 60/40 portfolio.

Think about that for a second. People with millions, paying for premium financial advice, and their advisors are giving them the same allocation you could get from a slightly more complicated target-date fund (yes, the role of a good financial advisor is not just the portfolio manager one; still, that’s what you get in the majority of cases). Either these advisors don’t know about alternative investments (unlikely but…not surprising in UCITS land), or they don’t think their clients can handle them (condescending), or they realised that simple products are more “cost effective” for them (bingo).

[I think this strategy can only work in our uber-conservative Old Continent. Try this strategy in the US and your advisory firm will go bankrupt in year one.]

This is where the DIY approach starts looking attractive, even for people who could easily afford professional management.

The Cockroach Portfolio Revolution

The best approach I’ve discovered in recent years is definitely what’s called the Cockroach Portfolio. The name is perfect: like cockroaches, this portfolio is designed to survive almost anything. Nuclear war, inflation, deflation, market crashes, currency crises: the Cockroach Portfolio just keeps crawling forward.

But here’s my conviction: we can build something similar on our own, without needing access to exclusive institutional investments or paying additional management fees.

One of the biggest shortcomings I identified in my original Family Office post was how difficult it was to access certain asset classes “beta”. The good news? The investment industry has been slowly democratizing access to “alternative beta” solutions. Products like DBMF or the ETFs from Bob Elliott’s Unlimited Funds are bringing institutional-quality strategies to regular investors.

These products partially solve the manager selection problem. Instead of trying to pick which hedge fund manager will outperform, you’re accessing the ‘broad’ underlying strategy itself. There’s still model risk, and you still need to understand their process, but the barrier to entry is much lower than traditional alpha strategies.

What’s Still Hard to Access

That said, there are still asset classes where democratization hasn’t happened yet:

Catastrophe bonds remain largely institutional-only. The recently listed ETF, ILS, is not replicating at all the performance of the best mutual funds in the same category. Seems like the product is heavily diluted.

Tail risk strategies like BTAL and CAOS exist, but the options are limited. Still waiting for a EurekaHedge Long Volatility Index replicator.

Farmland is getting easier to access through REITs and platforms, but only in the US.

Private credit is slowly opening up, but most retail-accessible versions are either watered down or overpriced or suffer negative selection. And probably it is not even necessary.

Fringe assets like music royalties, art, insurance life settlement, litigation financing remain mostly playground for the wealthy or specialty platforms with questionable economics.

The democratization is happening, but it’s uneven and slow.

The Due Diligence Network

Here’s where the internet becomes genuinely useful for investors: it’s created networks where ideas get challenged by smart people in real time.

TopTradersUnplugged is a fantastic example. The host and guests actually go after each other. They bring out their differences openly, discuss pros and cons directly, challenge assumptions in real time. After listening to one of those episodes, you understand that you’ll never find the perfect investment solution, but you can make judgment calls with your eyes wide open.

Compare that to something like Animal Spirits or most content from Ritholz Wealth Management. They rarely challenge the people in front of them. Sure, two episodes later they might mention that a product they previously hosted has issues, but they never do it during the actual interview. Not exactly “evidence-based” investing, is it?

This distinction matters because it shows you how to think about due diligence. You want environments where ideas get stress-tested, not just promoted. Internet created the opportunity to outsource due diligence smartly and effectively.

The Three Pillars Strategy

I recently listened to a podcast that crystallized how professional family offices actually think about asset allocation. The guest broke it down into three core principles that I think work for anyone, regardless of wealth level:

Pillar 1: High Static Risk, No Market Timing

When you’re managing long-term money, you can handle volatility. You should take static risk because you have time for it to work in your favor. But you should never try to time markets.

This should be table stakes by now, but I literally just had an argument with a “professional” advisor who believes you can fix goal-based investment philosophy’s shortcomings through… market timing. He’d never admit that’s what he’s doing, of course, but that’s exactly what it is.

Here’s the thing about “long-term” in this context: it doesn’t mean “I won’t touch this money for 30 years.” The endowment model was designed to support institutions that need a constant cash flow from their investments. Long-term means the bulk of the investment won’t be spent on a specific date.

This is actually the best strategy for any goal-based approach because, and this is crucial, goals are moving targets too: both in terms of priority and timing. If you don’t understand this principle, go watch Forrest Gump again. Even he figures it out eventually.

[Later in the podcast, Miranda kind of pulls back from this point. The retraction feels like a common fallacy…unless you’ve built some super-robust valuation model that nobody else has access to (which, let’s be real, most people haven’t).]

Pillar 2: Embrace Illiquidity (But Only for Extra Returns)

If you can handle illiquidity, you should demand extra returns for it. Don’t accept illiquidity just because something is labeled “alternative.” And absolutely don’t embrace illiquidity because an investment looks less risky due to “volatility laundering”, the practice of smoothing reported returns to hide underlying risk.

This pillar needs a giant caveat today: take illiquidity only if it genuinely means additional returns. Private equity that trades at the same (or higher) multiples as public markets but reports smooth returns because they only mark to market quarterly? That’s not additional return, that’s just hidden volatility.

Pillar 3: Choose Concentrated Specialists Over Asset Gathering Machines

Work with concentrated, specialist, entrepreneurial, owner-operated asset managers who have most of their own wealth in their funds or firm. Avoid the big retail, publicly-listed asset managers that launch 40 new funds every year.

This needs some nuance. Big asset managers are totally fine for simple beta exposure: they provide it at almost zero cost.

The problem is when big managers try to do complex strategies. They’re incentivized to gather assets, not generate returns. They’ll launch products based on what’s popular without prioritising, or investing in execution.

Meanwhile, smaller specialists like Andrew Beer (DBMF), Meb Faber, Corey Hoffstein, and Wes Gray are entrepreneurs first, asset managers second. They’re rowing in the right direction and worth following.

The Art of Manager Selection

The podcast guest was honest about something most people won’t admit: manager selection is more art than science, even for professionals.

I prefer the approach of guys like Bob Elliott and Andrew Beer, trying to capture beta rather than betting on alpha. But this isn’t risk-free either. You’re trading manager risk for model risk.

Social networks actually help here. I’ve listened to podcasts with David Orr, followed him on Twitter, seen his ideas challenged and refined in real time. When he launched his ETF, I felt confident giving him a try: not because I’m certain he’ll outperform, but because I understand his process and believe in his intellectual honesty.

That’s very different from investing with someone because they have, like, impressive marketing skills.

What NOT to Do

The same podcast guest explained why he stopped investing in commodities, and I think his reasoning illustrates an important principle: you shouldn’t be forced to invest in everything.

Just because commodities appear in many model portfolios doesn’t mean you need them in yours. If you don’t understand an asset class, really understand it, not just know what other people say about it, you probably shouldn’t invest in it.

This goes against classic investment advice, which can be seen as a push toward maximum diversification across every possible asset class. Owning things you don’t understand is a different kind of risk.

The Advisor Problem

What if you want to outsource this whole process to a professional? The economics get tricky fast.

First, you’re adding a layer of fees on top of the underlying fund fees. The advisor provides value by creating strategic asset allocation and selecting managers, but how do you measure that value? You need a proper benchmark, maybe something like a simple LifeStrategy portfolio.

But what benchmark is fair? Maybe 60/40 is reasonable for your situation, maybe not. And here’s the second-order problem: as your financial knowledge grows (hopefully), you might start thinking you could have done this yourself.

Then there’s the distribution problem. You can’t use big banks for this because they have massive conflicts of interest. They’ll sell you the funds that are best for their profit margins, not your returns. They’ll hide costs and push products based on their internal incentives.

Big banks do have two advantages: lots of offices, the ability to meet IRL (convenient) and… invitations to sports events? The convenience factor is real, but probably not worth the conflicts and hidden costs. And you can start to pay for events with the savings in fees 😉

Building Your Own Network

This brings us back to the network approach. The internet has created opportunities for due diligence that didn’t exist before. You can follow money managers on social media, listen to them get challenged in podcasts, watch how they respond to criticism.

You can build your own informal network of smart people whose judgment you trust, even if you’ve never met them in person. You can participate in communities where investment ideas get stress-tested rather than just promoted.

This isn’t about becoming an expert in every asset class. It’s about developing the judgment to distinguish between solid reasoning and sophisticated-sounding nonsense.

The Middle Path

Here’s what I think works for most people who want something more sophisticated than target-date funds but less complex than running their own hedge fund.

Start with the Cockroach Portfolio approach: high static risk, no market timing, embrace appropriate diversification. Use low-cost index funds for your core equity and bond exposure and add complexity gradually through ETFs that provide exposure to alternative strategies.

And remember: the goal isn’t to build the perfect portfolio. The goal is to build a portfolio you understand, that you can stick with during difficult periods, and that gives you exposure to a variety of return sources without betting everything on any single strategy.

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