Our investment philosophy is based on the Four Quadrants framework developed by Charles Gave and Harry Browne.*
As depicted in the chart below, at any point, the economy is in one of the following four phases:
The core asset classes of a diversified portfolio: stocks, bonds, cash, and gold, perform differently in each quadrant. The specific percentage allocation, type, and vehicles for each asset class will vary with each individual. However, holding a diversified portfolio across these asset classes should enable investors to be prepared and resilient in any economic environment.
The horizontal axis measures economic activity:
The vertical axis measures price and monetary inflation:
Deflationary Boom/Prosperity
Bullish for stocks, bonds, and long-duration assets
This economic environment is typical and one in which capitalism thrives. Inflation is low but positive. Corporate profits are substantial, confidence is high, and economic growth booms. This environment is ideal for stocks, real estate, and bonds. Essentially, any asset with a “long duration” does well. Cash goes up in real terms, and gold tends to underperform.
Inflationary Boom
Bullish for gold, stocks, and stores of value assets
This environment occurs when prices and monetary inflation rise rapidly. Historically, this environment generally coincides with wars and deficit spending. Government debt levels are high, and the money printer is often in overdrive. In this environment, gold is the best asset to own. Commodities and real estate perform well in tandem with stocks. Cash tends to remain stable, and bonds often perform the worst in this environment.
Inflationary Bust/Recession
Bullish for cash and gold
This is a challenging environment for almost every asset class as stagflation sets with high inflation, rising interest rates, and low growth. This typically leads to an economic recession, declining stocks, and bonds. In this environment, gold and cash provide ballast for a diversified portfolio.
Deflationary Bust
Bullish for bonds and cash
This environment occurs when prices and interest rates fall. This is the single most disliked environment for central bankers. Long-duration bonds thrive in this environment. Cash also performs well. Stocks take a beating. As interest rates approach the zero-bound, gold often performs well, as the opportunity cost of holding gold, which produces no yield, diminishes.
*Sources:
Gave, C. (2024). The General Theory of Portfolio Construction. GavekalBooks.
Rowland, C., & Lawson, J. (2012). The Permanent Portfolio: Harry Browne’s Long-Term Investment Strategy. Wiley.
Browne, H. (2001). Fail-Safe Investing. St. Martin’s Griffin.
