As Bill often reminds readers, nobody knows precisely what the future holds. That’s why a diversified portfolio is essential for any investor. Today, Bill Bonner Letter coauthor Dan Denning and Bonner Private Portfolio editor Chris Mayer discuss how investors can thrive no matter what the market does.

Dan Denning (DD): In the July 2017 issue of The Bill Bonner Letter, Bill and I published an asset allocation strategy for readers. The idea of negative correlation is, I think, key to a traditional asset allocation strategy (60:40 stocks and bonds). But given central bank intervention has caused nearly all assets to go up (distorting values), does asset allocation make any sense anymore?

Chris Mayer (CM): Interesting question. I like having an asset allocation because I think psychologically, it helps you get through rough patches. And I think re-balancing is the key. It forces you to buy more of things when they haven’t done well, which is usually when they’re cheaper. And vice versa. I don’t think it’s an exact science. I think it’s more a personal decision, based on what your goals are.

DD: What do you think of the strategy we recommended in The Bill Bonner Letter last July? To refresh: 25% in cash, 19% in bonds, 25% in stocks, 30% in tangible assets/real estate/precious metals, and 1% in cryptos. Initial thoughts?

CM: I like it. I’m not a fan of cryptos – too speculative for me. I don’t own any and I just don’t have any interest in them. I’m happy people have made money owning them, but they’re not for me.

I like what Bill has written about before: one-third in gold, one-third in cash, and one-third in carefully selected stocks. It’s simple. And it works for him, because he’s not interested in getting rich. He’s already rich. That matters. But if you’re young and still working to get financially comfortable, then I’d say that allocation is crazy. You should hold way less cash, for example.

DD: Were you surprised with our decision to include cryptos as an emerging digital asset class and recommend a small position in them?

CM: Yes, I was surprised – because I know Bill. And when I talked to Bill about it, he said it was your doing. (Laughs.) Well, it’s a great call so far. I’m too much of a Luddite, I guess.

[Note: When Dan recommended a 1% allocation to cryptocurrencies in The Bill Bonner Letter, bitcoin was trading around $2,500. Even with recent pullbacks, anybody who purchased bitcoin at the time is up about 250%.]

DD: Let’s deal with each of the other specific asset classes (assuming you agree cryptos are a new digital asset class). 25% in cash is based on our view that financial markets are complex, fragile, unstable, and a more dangerous place than usual to have a lot of your net worth held hostage.

But we’re not fans of the U.S. dollar. And cash is an investment position that assumes equities and bonds, having performed so well in the past 20 years, will perform poorly in the next 20. Cash gives you the “optionality” to buy nice things when they’re on sale. Are we over-allocated to cash?

CM: I don’t think so. I personally have about 30% in cash. I have the Bonner Private Portfolio at about 30% cash. I like cash and the optionality it provides, especially now that we’ve had a long bull run and the cycle is, shall we say, mature.

DD: What about bonds? Bill and I had a hard time making the case for owning bonds at all, given the historically low interest rates, historically high debt, and our mean-reversion expectations for the bond market. But as you’ve pointed out, it helps to look at things on a case-by-case basis rather than in the aggregate.

Are there sovereign, corporate, or municipal credits you think ought to be in an investor’s portfolio? In a world full of debtors, who are the most creditworthy borrowers?

CM: I don’t like government bonds. But I’ve seen interesting corporate bonds on offer at various times. For example, in early 2016, you could’ve bought senior bonds of HC2 Holdings and earned 16% on your cash – because they were trading below par. We know HC2 well and knew that their money was good. The bonds recovered by the end of the year – and actually traded above par. So that’s a great example of what careful “bond-picking” can bring.

And I’d also include preferred stocks here – maybe create a “fixed income” bucket for bonds and preferred stocks. For example, in early 2016, you could’ve bought the preferred stock of General Finance, another company we know well, at a discount to par and earned 13%. The CEO was buying shares himself! Again, the preferred stock recovered and now you’re sitting here earning 13% on your money, with a nice capital gain to boot.

DD: Do you think gold is sound money? Have you always thought so? I know you own gold, but what about gold stocks?

CM: Money is whatever people decide it should be. I don’t believe anything is intrinsically money. Money isn’t a “thing.” “Money” is a word that refers to an idea. Even the idea of what money is or should be differs from person to person. I like what Bill told me when I was at his château in France this past summer: “That gold is real money is a myth… but a useful myth.” (Laughs.)

I still like gold. I own it. I don’t like gold stocks because they’re mostly terrible businesses.

Having said that, we do own a small position in a gold mutual fund in the Bonner Private Portfolio, mostly with the idea that doing so could juice up the return of our much larger physical gold holdings.

DD: And lastly, stocks. Now this is your beat, so I won’t try a leading question. What should we own and why?

CM: Well, maybe you shouldn’t own any. Lots of people don’t have the temperament for stock investing. But if you know what you’re doing, or can find someone to guide you, stocks are a wonderful way to create wealth over time – and a lot of fun, too. You learn so much about the world, about people, about how things work, about history… It’s an intellectual feast unlike anything I’ve ever come across in my life. It never gets boring because things are always changing and there are always new companies.

When you own a stock, you own a piece of a business. And you can put together a portfolio of your favorites. It’s like having your own baseball team and you’re the general manager. And you can follow how your team does over time and trade players every now and then. I love it.