I’ve been a “VT and chill” type of indexer for years, assuming that as long as I didn’t panic during a crash, I’d be fine. But after following the [Chronicles of 2026 - the next chapter - #484 by PhilMongoose](Chronicles of 2026) thread on the Mustachian Post forum, I’ve had a bit of a wake-up call.
I used to see drawdowns as just a psychological issue—something you just “tough out.” But I’ve realized they are actually a mechanical threat to a portfolio’s trajectory. Sequence risk can derail a decade of growth because the math is unforgiving: losing 50% means you need a 100% gain just to get back to zero. My current 100% equity approach feels too vulnerable to both sudden flash crashes and long bear markets. Traditional approaches suggest to just add more bonds , but this brings issues with expected return (low) and increasing correlation of asset classes. Then there is the discussed risk parity approach which seems not to fit me well.
I wonder if there is a better way and i found some interesting hedge protects. I’m considering a more resilient setup to protect the engine:
• 70% Core: Moving to Dimensional (DFAW) with a bit of CHSPI as a currency anchor. I like DFAW because it has a sophisticated factor tilt toward profitability and quality, which should help lower drawdowns while still giving me massive exposure to 12,000+ companies. Plus, the US domicile is more tax-efficient for us via the DA-1 form.
• 20% The Tortoise: Trend-following (DBMFE or Man AHL). This is the “brake pedal”—it can actually turn a profit during long bear markets by going short.
• 10% The Airbag: A tail-risk fund (like SPQH). This is for sudden “black swan” crashes where the market drops 20% in a week and the tortoise is too slow to react.
My main questions are really about these special vehicles. Where is the catch? What am i missing.
It sounds good in theory, but I’m assuming the catches are:
The “Insurance” Bleed: The Airbag costs money every month and will likely be “red” for years during a bull market. How do you handle that “line-item regret”?
Tracking Error: In a vertical bull market, this will definitely lag behind a simple global index.
Am I over-engineering this, or are others looking at this kind of protection to save their compounding engine?
I think the usual method is to gradually transition to bonds as you approach retirement age. That way you reduce volatility just before retirement without having the bond penalty for decades before retirement.
Other ways to have a mix of assets and ride through it. For me, real estate should provide steady income. Dividends also provide income. This way SORR becomes less of an issue as you could avoid selling entirely: instead of selling down when conditions, borrow against the portfolio.
Switching from a VT and chill to this kind of allocation triggers a lot of unknown behavioral aspects and a lot more (self-)management. You’d have to maintain your allocation.
Sure tail hedge will bleed. Are you ready to feed a losing product over time? Given your target allocation you’ll need rebalancing rules and stick to them, whether it’s TH or MF they’re not intended to be a one-time thing to perform.
You have to assess your risk tolerance and manage that SORR.
I’ve been through the same kind of thinking and results/ideas, I had a TH product awaiting a black swan event, I was interested in Trend following MF, I’ve been story telling myself about theories which aren’t my field of expertise to calm my fears, and my interest eventually faded - it should not, the more you engineer, the more it becomes a job.
Whatever you do, keep it at a level that you’re ready to manage over a long period of time, no matter what.
Maybe my view is too simplistic (and I didn’t look up the tickers) but to me it seems you would want to be long and short the same/very similar assets simultaneously.
I mean I get the idea, adding a drag in bull markets to protect from bear markets. I guess I would rather reduce my asset allocation than add that level of complexity.
(Like betting for and against the same horse in the same competition).
I can see why it looks like a paradox—on paper, it definitely feels a bit like you’re paying to bet against yourself. I’m still working through the logic, but the way I’m looking at it is that it’s more about how the portfolio might react to different “speeds” of a crash.
The idea is that the “Tortoise” (Trend) isn’t always short. Most of the time, it should be long right alongside my global stocks, potentially stacking up gains during a normal bull market. It might only rotate into “short” positions if it detects a real downward trend forming. It’s supposed to act more like a smart braking system that only applies pressure when the road is getting slippery.
As for the “Airbag” (Tail Hedge), it shouldn’t really care about small 5% or 10% dips. It uses options that are way out of the money, so it might only “pop” in a massive, sudden collision like we saw in March 2020. I don’t think of it as betting against the horse, but maybe more like a parachute for the rider just in case things go completely sideways.
The real benefit should hopefully come from a mechanical rebalancing strategy. I wouldn’t try to time the bottom by hand, but the idea would be to follow a strict rule—for example, if the “Airbag” weight drifts more than 10% off its target, I’m forced to sell those expensive gains and buy more of the “cheap” stocks. It seems like a way to force yourself to buy the dip when everyone else is panicking, but I’m curious if people think that’s actually doable in practice..
I agree that so far human behavior difficult with this setup and the ability to stick to it while it can underperform for years..
I mean sure the airbag will bleed as Its meant as a pure insurance e.g crash -Kasko for your new car can be expensive but even more expensive is crashing your car. Most people never need it but for some it can be existential.
If you consider the cost of the insurance over the entire portfolio and not just the single position it doesnt look to expensive (1-3% per year?).
I wonder if besides the human behavior component (which is obviously critical), the approach would hold in practise if executed rigorously or if there are systematic issues with this setup?
Here I need to remind of a Ben Felix video titled “have Vanguard got it wrong?”, where he discusses that 100% long equities forever is the mathematically optimal approach. Good on paper, irrelevant for real world humans, maybe even irrelevant for institutions.
I don’t think you’re missing anything, there’s no catch, they work (look at CAOS for airbag for instance) as intended but the market conditions may not favor them…ever and you end up with underperformance for many years, and increased frustration. Now, my read is rough, guttural and unsophisticated, JEPG, Moustacienne and Phil all laid it out better. Having been through the same deliberations and looking at alternative funds I ended up with the idea that toughing it out and focusing on small wins (eg #shares, dividends going steadily up) is what I hope will get me through a bear. In the end pragmatism must win, if I’ll need to sell I’ll just sell, if not then not!
Edit: diversification within and between asset classes and rules-based rebalancing may be the only simple way that works long term. What’s not simple is finding the unicorns of uncorrelated assets
Maybe best way is to separate it into a separate brokerage account that you never look at. That way you never see/feel the under-performance and just think of it like an insurance policy.
Had the same questions than you had (but just going up to your tortoise, no airbag). But choosing the right fund seems so much more complicated than with the standardized index ETF. Furthermore I doubt that 20% are enough, it should be at least 30-40% to have a real effect.
No solution here, basically just saying that you are not alone in the struggle
I came accross this strategy through the Finanzwesir, who also has skin in the game (Disclaimer : he sells a product using this, after decades of propagating Index Funds+High grade Bonds or Saving account). The argumentation is valid for me, but how do I put it into place operationnally is my big question. Like which trend follower fund to choose ? Where can I find them and how can I compare them ? Should I take more than one ? how much weight ? 40%, 50% ?
So many questions and no real answers to be found.
In the end, I ended up with: I am doing better than probably 98% of the population, Let that be a problem when I really Fire and have time to ask all these questions (and find the answers to them). In the mean time, don’t succumb to Lifestyle inflation, ride my bike and look at the stash getting bigger.
Not really the same thing but I do have some SCHD, SCHY and BRK.B mostly to diversify from too much US tech with high valuations, but over the last 6 months the first 2 have helped a lot - both up about 13.5% over the last 6 months. BRK doesn’t seem to do much but probably helps if there is a steep fall.
I understand your intellectual approach to this. As I am 60 years old, I need to preserve wealth andwould like an average annual performance of 5% after inflation. I don’t understand bonds, therefore I don’t touch them.
I’m a kind of firing-by-the-seat-of-my-pants guy and originally had the approach to invest mostly in VT. A few years later, VT was just 6% of wealth, as I wanted to balance risk with another issuer of ACWI-ETF. Together they are now 8%. 50% is precious metal (my insurance that provided a lot of performance in the 2 previous years). 14% in pillar 2&3. 10% of cash. 3% crypto, 3% energy, 2.5% lottery tickets (with 10x up- and 100% downside).
I chill well with my mixed bag of goodies and I am currently at +9% YTD (tariffs, war, ai threat to jobs).
Thanks for the input. Wow, thats an unique portfolio! Wish you all the best on your retirement journey
As a side note, I would classify lottery as entertainment expense rather than an investment as it has a structural, negative return expectation (overall about 50 cents per 1chf „invested“). Not what you want in an investment and very different to all the other assets you mentioned.
Precious metal are often referenced as a hedge, thought 50% allocation seems very bold imo. After all its an unproductive asset class as mr buffet always liked to stress. The strong appreciation of the last few years make many people forget that gold experienced a 24 year draw down (1983-2007) - way longer than any period in global stocks. Also it was quite a bit more volatile than global stocks in the last years. So not sure it really helps structurally to smoothen my rideyx
With a downside of 100% and an upside of 100x (i.e. 10,000%) there is a chance of making some money while being entertained Even with 9 out of 10 “investments” failing, no. 10 can deliver.
With such investments, there is a lot of volatility included and with pre-set sell orders of half the shares at double the price, I can de-risk my positions. So far, 4 of 16 positions have been fully de-risked within 14 months.
I discovered the Risk Parity Radio podcast/website several months ago and am a regular listener since. It’s about constructing risk parity style portfolios for the drawdown phase i.e. portfolios that support a higher withdrawal rate and are less volatile than standard equities/bonds portfolios. It’s US based, but I think many of the principles also apply for us european investors. Just thought it might be relevant for your situation.
You could use DFAC + DFAX (or use the upcoming DFA ucits offer for the ex-US part, to avoid potential double taxation of US domiciled ex-US holdings), to dial in your desired ratio.
I like this. I make heavy use of such funds as well.
At 20% I‘d try to diversify into multiple funds for sure.
These strategies need a lot of conviction though and can go side-ways/down for long times, while equities are ripping.
Can work, and there is research suggesting deep otm puts could be systematically underpriced, as there is a lot more demand for going long.
I like CAOS here. It only starts really working in deep fast crashes and is not bleeding money during calm times.
I don‘t think such a portfolio will underperform equities much over the long run. But imo has a high chance to perform a lot lot better if equities begin to struggle in the future for a longer period, like a lost decade.
Depends on your journey, where you are at, your risk tolerance, your goals etc.
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Even with 9 out of 10 “investments” failing, no. 10 can deliver.