The document discusses building antifragile investment portfolios that benefit from uncertainty and randomness. It recommends starting with a low-cost fund that provides global market exposure across multiple asset classes. This forms the core of an antifragile portfolio. It then suggests combining this with short-term treasuries to control downside risk. Specialist managers may also be added to gain incremental returns or leverage the overall portfolio if desired. The goal is to create a portfolio that can experience small losses but not catastrophic ones, while still preserving significant upside potential.

1. Building an Antifragile Investment Portfolio
Greg Johnsen, CFA
Eastgate Advisors, llc

2. Life Is Full of Randomness and
Uncertainty
Some examples:
• Evolutionary changes in biological organisms.
• Genetics.
• Lottery winners.
• “Expert” forecasts.
• Global market returns.
Can we actually benefit from uncertainty, randomness,
disorder or volatility in our investing?

3. YES!
By Building Antifragile* Investment Portfolios
*Taleb, Nassim Nicholas. “Antifragile. Things That Gain From Disorder”. Random
House, 2012

4. Fragility
• Something fragile breaks when stressed or
something unexpected happens.
• But, something that is antifragile benefits
from stress, randomness, disorder or
uncertainty.

5. A fragile investor is one who owes $100,000 and
loses a job, an antifragile investor is one who has
$100,000 in savings.
Fragile Versus Antifragile

6. Antifragility
• Antifragility limits the adverse impact on us when bad
things happen.
• Antifragility does not mean avoiding bad things.
• Antifragility allows us to survive and prosper with the
uncertainty and randomness of life.
• Antifragility does not require advanced degrees.
• Antifragility does not require predicting the future.
• Antifragility does require accepting controlled stresses.
• Antifragility is not the same as certainty.

7. Antifragile Investing
• Investors who require a return which exceeds
the return of a risk free asset must assume
risk (stress).
• An antifragile investment portfolio benefits
from volatility, randomness and uncertainty
and has greater upside potential than
downside risk.
• Antifragile portfolios possess optionality.

8. What is Optionality?
• Optionality allows investors to take advantage
of opportunities or avoid assuming more
stress than desired.
• Optionality is a valuable trait of an antifragile
portfolio.

9. Some Investing Truths
• Market returns are mostly random and uncertain.
• Investors do not have control over global markets.
• Skilled, active managers exist but fewer of them exist than the
investment industry would have us believe exist.
• Even skilled active managers have cyclical periods of
underperformance.
• Most active manager excess returns are statistically random
outcomes: It takes from 11 to 44 years of return history to
determine, with 95% certainty, whether an active manager
has skill or is just lucky.
• Investors do not have control over active manager returns.

10. % of Active US Equity Managers
Outperforming Style Benchmarks
Source: Morningstar Direct. © 2014 Morningstar. All Rights Reserved.

11. More Truths….
• Investment fees and expenses are one of the
things an investor can control.
• Investment fees and expenses matter.
• Investors tend to feel losses more acutely than
gains, so managing down-side risk is important.
• Investors also control the risks they choose to
assume.

12. Conclusions
• Investors should focus on controlling what
they can actually control.
• Investors should build antifragile investment
portfolios that benefit from randomness and
uncertainty.
• Investors should measure success over years
and not quarter-by-quarter.

13. Some Basic Theory
William Sharpe’s market portfolio concept (1964)
• Best expected return for the market risk assumed.
• He called this the “efficient” market portfolio.
Eugene Fama’s Efficient Market Theory (1970)
• Market prices reflect all known information relating to
the price of an asset.
• Only new information has an impact on prices.
• Each asset should have the same price in all global
markets if markets are efficient.
• Implies that active management should not add value.

14. Sharpe’s Global Market Portfolio
- Market Risk +
--ExpectedReturn++
Global Market
Portfolio of all
investible risk assets Levered GMP:
GMP + borrowing
De-levered GMP:
GMP + Risk Free
Asset
Risk Free Asset

15. What Does The Actual Global Market
Portfolio Look Like?
– $150 trillion in global markets*
• 67% was debt/bonds ($100 trillion)
– US bond market was about 24% of total global debt
• 33% was equities ($50 trillion)
– US stock market is about 50% of total global equities
– 67%/33% allocation implies an expected return of
about 4% annually to the global markets portfolio.
*2012 Bank for International Settlements (BIS) quarterly global review of
bank holdings report.

16. Investment Risk Considerations
• Some investment risk has expected returns.
• Some risks have no expected returns.
• Investors need to understand their risk
tolerances.
• Investors should avoid uncompensated risks.
• Volatility by itself is not compensable.

17. Examples of Compensated Risk
• Market risks
– Risk relative to the global market portfolio
– Size (small stocks have outperformed large)
– Low price-to-book stocks (unloved stocks)
– Term (longer maturity bonds have outperformed)
– Credit quality (lower quality has outperformed)
• Leverage
• Liquidity

18. Examples of Uncompensated Risk
• Idiosyncratic risk- lack of adequate diversification.
• Fees- A form of wealth transfer. Higher fees do not
necessarily result in better returns, just wealthier
investment managers.
• Active Risk- Few active managers have demonstrated
statistically significant, persistent skill. Fama’s efficient
markets theory implies that positive excess returns
should not exist if markets are efficient.
• Principal-Agent risk- what is good for the agent is not
always good for the principal (investor).

19. Building Antifragile Portfolios
• Consider Sharpe’s global market portfolio.
– Diversified across markets and asset classes.
• Combine the global market portfolio with the risk
free asset to de-lever the market portfolio or to
manage down-side risk.
• Or, lever up by borrowing or using small cap
stocks, emerging markets, high yield bonds,
private markets in higher % than they are found in
the global market portfolio (a form of leverage).

20. Some Considerations
• A de-levered global market portfolio has lower
risk and a lower expected return than the
GMP.
• A levered global market portfolio has higher
risk and a higher expected return than the
GMP.
• Investor down-side risk tolerances and return
requirements are important.

21. Building Antifragile Portfolios
• Start with a mutual fund or ETF with global,
multi-asset class market exposures.
• Combine it with a US treasury bill to control
down-side risk or to manage liquidity.
• Add specialist managers/funds to add
incremental value or lever up the GMP if
needed (examples include emerging markets debt,
small cap stocks, commodities, REITs).

22. The Antifragile Portfolio
• Global markets portfolio (95% ticker AOR)
– Global equities (60%)
• US equities (large, mid and small)
• Non-US equities (large and mid)
• Emerging markets equities (large and mid)
– Bonds (40%)
• USD denominated bonds (US and non-US issuers)
• US treasuries (all maturities > 1 year)
• US credits (investment grade, non-investment grade)
• US Treasury Bill (5% UST)
• Cost: = .24% annually (plus advisor’s fees)

23. Antifragile Portfolio Benefits
• You have a globally diversified GMP proxy which benefits from
the unpredictability and randomness of global asset returns.
• You have built an investment portfolio that can experience
small but not catastrophic losses.
• You control the level of down-side risk you assume by
combining the GMP with a risk free asset.
• You can control investment expenses.
• You have preserved the majority of your up-side return
potential and possess optionality.
• Your portfolio is theoretically supported.
• You have reduced your stress and simplified your life.

24. Thank you for your time.
Feel Free to Contact Us
Greg Johnsen, CFA
Eastgate Advisors, llc
gjohnsen@eastgateadv.com