INTRO
Today we introduce The Butterfly Portfolio – a modern framework for risk-first investing. Built on the foundation of resilience and Christopher Cole’s Dragon Portfolio, we’ve sharpened key elements to enhance accessibility, customization, and real-world application. We’ve taken what works, added our own edge, and created a portfolio designed to thrive in a world where risk isn’t just a number – it’s the game itself.
We’ve had the privilege of meeting Chris Cole, one of the smartest minds in risk and volatility. His research is essential reading for anyone serious about portfolio resilience, especially “Allegory of the Hawk and Serpent” , the foundation of our evolution.
We designed the Butterfly Portfolio with two clear objectives: 1. Elevate the conversation about asset allocation, portfolio construction, and risk management; 2. Deliver practical tools that move beyond theory – to give investors an actionable edge in navigating risk.
THE DRAGON PORTFOLIO
Cole’s Dragon Portfolio’s 100-year back-test proves its resilience across every market regime — inflation, deflation, booms, busts, currency crises, demographic shifts, and wars. Its strategy is simple yet powerful: a roughly equal 20% allocation across five different asset classes — stocks, bonds, commodity trend, precious metals, and volatility – each playing a distinct role in balancing risk.
At its core, the Dragon Portfolio is built for dual protection – hedging both inflation and deflation. This barbell approach to portfolio construction isn’t just a theory; it’s a necessity in a world where the debate between inflationary and deflationary forces is far from settled.
The inflation/deflation tug-o-war kicked into high gear during the Great Financial Crisis (GFC). Markets deflated, and the Fed intervened aggressively — injecting liquidity (aka inflation) into the system. Since then, these opposing forces have only intensified, fueling an ever-expanding web of complexity. And as complexity grows, so does risk – exponentially.
The barbell approach is built to withstand both inflation and deflation, offering resilience no matter which force wins out. We favor this multi-asset framework over the outdated 60/40 stock/bond zeitgeist, which relies on just two levers – stocks and bonds. With five uncorrelated asset classes, the Dragon Portfolio isn’t just more diversified – it drastically reduces the risk of being on the wrong side.
MODIFICATION #1: HARD ASSETS, REAL EDGE
We kept the core but sharpened the edges for better execution and flexibility. The Dragon Portfolio sparked two common questions:
- What exactly is “commodity trend”?
- How do I invest in volatility?
Our Butterfly Portfolio refines commodity trend and volatility, staying true to the Dragon’s core philosophy: balancing inflation and deflation risk through a multi-asset approach. We prioritize clarity, while reinforcing the portfolio’s ability to hedge both inflation and deflation. Our framework serves as a building block to customize portfolios in a dynamic environment that demands flexibility over static solutions.
Our first modification swaps commodity trend with outright commodity longs. This simplifies execution while maintaining diversification. Just as stocks and bonds represent broad asset categories, our commodity bucket extends beyond traditional markets – incorporating hard assets like real estate, collectibles, trading cards, and art. These tangible stores of value already sit on many balance sheets and deserve recognition as a legitimate asset class.
Our new hard asset allocation adds two key dimensions to the portfolio. First, it’s a decisive tilt toward inflation. Commodity trend strategies, typically managed by CTAs (Commodity Trading Advisors), are market-agnostic — trading both long and short across multiple asset classes. This flexibility can create a wider dispersion of returns. A straightforward long commodities approach, however, provides a more direct and intuitive inflation hedge.
The second layer is personalization. Many investors already own hard assets — real estate, art, collectibles, or other tangible stores of value. These assets can be less liquid and more volatile, but history shows they play a crucial role in wealth preservation. Whether it’s real estate compounding generational wealth or trading cards proving their value during COVID, a true risk-aware framework acknowledges what’s already on the balance sheet.
Our substitution creates a customizable asset class that adapts to each investor’s reality. But to track and assess this allocation, we need a clear benchmark – that’s where oil comes in. As the master resource, oil serves as a strong proxy for commodities and hard assets as a whole. We acknowledge the nuance in this approach, but oil remains the best singular benchmark — effectively capturing the inflationary tilt and real asset exposure that defines this portfolio adjustment.
Commodity trend strategies, often run by CTAs, provide valuable diversification but introduce complexity that most investors can’t practically implement. To simplify execution while preserving inflation protection, we anchor this allocation to a long commodity position — using oil as our benchmark. As the master resource, oil offers an accessible, intuitive proxy for hard assets while maintaining the Dragon Portfolio’s core resilience principles.
MODIFICATION #2: CASH IS KING
Volatility is out, and cash is in. This second tweak strengthens the barbell – providing a definitive deflation hedge to balance our inflation-tilted commodity allocation.
That doesn’t mean volatility is irrelevant. The concept of “the right tail” — a chaotic surge in prices to the upside – has only grown more significant with the inflation genie out of the bottle. We’ve seen it play out in real time, with equity markets in Venezuela and Turkey skyrocketing as their currencies collapsed.
The key question: Will rising equity prices keep up with inflation — or simply mask the erosion of purchasing power? Either way, the right tail has merit. When inflation spirals, stocks can act as a release valve, offering a temporary store of value as cash races for the exits.
While volatility can hedge both market surges and crashes, cash is a pure deflationary play. Our two modifications – hard assets and cash – create a clearly defined, accessible framework that strengthens the barbell, enhancing both inflation and deflation protection.
VOLATILITY: THE MISSING PIECE
Chris Cole said it best:
“There is a tiresome debate as to whether or not volatility is an asset class. Let me end that debate: volatility is the ONLY asset class.”
Volatility isn’t just something to hedge – it’s the lifeblood of markets. Understanding it isn’t optional; it’s essential.
The above chart exposes a hard truth – most portfolios aren’t truly diversified; they’re just different shades of short volatility. When markets come under stress – whether from a crash, liquidity squeeze, or crisis — correlations converge, and the volatility monster can destroy all. The solution? A deliberate, strategic allocation to long volatility. Because when the storm hits, it’s the one asset built to weather it.
Volatility isn’t an anomaly – it’s a constant. That’s why every portfolio needs a deliberate hedge for the unexpected. The 100-year back-test confirms this reality, and we’ve built on that foundation to create a more accessible, actionable framework.
But here’s the shift: the best volatility hedge isn’t inside the portfolio – it’s outside. We explored this in depth in our eBook, New Vol, and here’s the summary:
New Vol bridges the gap between financial risk and the solution set of building personal resilience, as advocated by Peak Prosperity, helmed by Chris Martenson. By redefining volatility from a market decline to a systemic shock, the series proposes an insurance strategy approach to risk management. It suggests absorbing the smaller risks of a market correction while insuring against the larger risks through the accumulation of wealth across various buckets of capital (financial, material, social, time, living, emotional, and knowledge). This innovative hedge aims to provide enhanced protection and improved quality of life by recognizing that all buckets are important, not just the financial one.
BUILD IT. LIVE IT. PROTECT IT.
The pieces are in place. Our multi-asset portfolio is built for resilience, optimized across five asset classes, and reinforced with chaos hedges that extend beyond the financial world. With a RISK FIRST approach, we aren’t just playing defense – we’re setting the stage to go on offense when the moment demands it.
