The Lyn Alden Investment Strategy is an investment framework designed for times of high inflation. The “3 Pillar Portfolio” Strategy is designed to combat the next 5-10 years of a potentially inflationary economic market. The influential and successful macroeconomic investor has flipped the script. Her new strategy has “inflation protection”. And it is designed to navigate a broad variety of market conditions.
The classic “60/40” stock and bond portfolio just isn’t going to cut it in the coming years.
In this article, we take a look at the “Three pillar portfolio”. And we learn why Lyn Alden describes it as the “cornerstone concept” of her macro investing.
Let’s do this.
Key Takeaways
- The Classic 60/40 Portfolio isn’t going to cut in the next 5-10 years
- The 60/40 stock/bond portfolio will under perform in the coming inflationary decade with rising energy prices and structural inflation.
- Invest Across Three Pillars for Inflation Protection and Growth
- Investing in Profitable Growth Assets (60%), Cash Equivalents (10%) and Energy/Commodity producers and hard monies (30%) will provide resilience and growth across various market conditions.
- Focus on Dividend Producing Growth Stocks
- Established companies with at least 10 years of consecutive dividend growth will provide capital appreciation and growing income streams during inflationary periods.
Lyn Alden: Macro Economic Investor Extraordinaire
Lyn Alden is the ultimate Macro economic Investor. She founded the Lyn Alden Investment Strategy firm. She is well respected by the financial community. And she works closely with Macro big guns like George Gammon and his 10/80/10 Strategy.
Alden’s frequent media appearances are always insightful. And she is famous for bringing a practical approach to wealth building.
With a background in engineering, Alden provides a unique analytical perspective to the world of finance. She has a mechanical brain and understands how systems work. And she brings a deep understanding of economic cycles, history and market behavior.
Lyn Alden also stands out for her long-term perspective on building wealth. Her insights are technical, but accessible for investors of all levels. And her engaging, data driven approach is actionable for the every day investor.
Let’s take a look at Lyn Alden’s 3 Pillar Strategy.
What is the 3 Pillar Portfolio Strategy?
The 3 Pillar Strategy is what Alden personally uses for her investments. It reduces the risk of investing in the inflationary decade ahead with rising energy prices and structural inflation. Alden believes it is “prudent” to have “inflation protection” in a portfolio.
This means the classic 60/40 portfolio will see disappointing results as these asset types prefer disinflation. Alden’s strategy creates a resilient and adaptable portfolio in these down times.
Let’s take a look at Pillar One.
Pillar One: Domestic and Global Stocks (Growth Assets) (60%)
The first pillar consists of domestic and global stocks that have profitable growth.
These “profitable equities” perform their best during disinflationary economic growth. They also produce cash dividends that grow each year, even during inflationary periods. And those dividends can be reinvested into more shares. That Buffett snowball begins here.
Alden recommends investing in companies with 10+ years of consecutive dividend growth. This means a domestic or global stock, with a sustainable payout ratio and solid growth prospects.
Example: Alden suggests some top stocks to buy.
- Microstrategy (MSTR) – Growth Stock
- HDFC Bank (HDB) – Growth Stock
- CVS Health – Dividend Stock
These stocks are great examples and are personally held by Alden in her public M1 portfolio. The are all set for strong returns for the next decade, even in an inflationary environment.
For more details and analysis on stock picks and examples that fall into this pillar, please take a look at Lyn Alden’s Top Stocks to Buy.
Pillar Two: Cash Equivalents (Defensive Assets) – 10%
The second pillar consists of cash-equivalents, short-term bonds, and TIPS. These are securities that are held for short term investing and they are highly liquid.
Cash equivalents are desirable because they are similar to cash. Meaning they can be used to provide liquidity, portfolio stability and they can be converted to cash quickly in an emergency.
Alden suggest cash equivalents will “generally tread water against inflation. And it can protect against liquidity contractions and recessions”.
Example: In Alden’s M1 Finance Portfolio, she holds two Cash Equivalent ETFs that account for 10%.
- SPDR Bloomberg T-Bill ETF (BIL) – 6%
- iShares 1-3 Year Treasury ETF (SHY) – 4%
Pillar Three: Energy/Commodity Producers and Hard Monies (Inflation Protection) – 30%
The third pillar consists of energy/commodity producers and hard monies. Alden believes that this pillar will do well during structurally inflationary periods. This means times of high energy prices and/or high rates of currency debasement (money printing).
This is important when structural inflation is higher for longer, potentially for decades.
Alden suggests that when nobody wants any exposure to investments like gold, bitcoin, energy producers, or commodity producers, is precisely when they start doing well. When inflation picks up, energy and commodities will perform well. While stocks and bonds perform poorly and investors flee to harder money alternatives.
Let’s take a closer look.
1. Energy Producers:
- Alden is bullish on energy producing stocks because of the supply and demand fundamentals. And if energy prices fluctuate, they don’t have to keep going up to be super profitable. They will “generate great free cash flow and payouts” regardless of any high or low market scenario.
- Examples: In Alden’s M1 Finance Portfolio, she holds various energy producers. These all generate dividends and continue to grow, such as Exxon Mobil (XCM) or Total Energies (TTE)
2. Commodity Producers:
- Commodities and their producers do the best when there is a period of inflation or stagflation. And when we enter energy driven inflationary periods, it’s important to have direct exposure to commodity producers.
- Examples: The commodity producers in Alden’s M1 portfolio are all well established, dividend producing growth stocks. These include Rio Tinto (RIO), Franco Nevada (FNV) and Wheaton Precious Metals (FNV)
3. Hard Monies:
- Hard Monies such as gold, silver, platinum and bitcoin have an eventual correlation with inflation. In stagflationary environments, hard monies do great. And gold in particular tends to do well when economic growth is decelerating but inflation is still high.
- When compared to equities, gold holds up well in recessionary and inflationary environments. Most investors do not hold physical hard monies. But there are digital alternatives that are highly liquid to invest in.
- Example: Alden holds commodity producers, but she also allocates 15% of her capital into the following ETFs and Trusts, Greyscale Bitcoin Trust (GBTC), Sprott Physical Gold (PHYS), Aberdeen Silver ETF (SIVR) and Aberdeen Platinum ETF (PPLT)
There are many ways to structure a portfolio. This three pillar portfolio strategy has significant commodity and inflation protection. And it comes with a slice of hard monies for good measure.
Now let’s take a look at why the 60/40 Stock and Bond portfolio may not perform well in the coming decades.
The 60/40 Bond and Stock Portfolio in a High Inflation Period
The 60/40 portfolio became popular during a four decade period of low interest rates. This supported bond prices going up and ever increasing equity evaluations. However, the 60/40 portfolio has historically seen disappointing results in times of high inflation.
Energy and commodity sectors are cyclical by nature. The 60/40 portfolio performed poorly during major energy and commodity bull runs. This includes the 1920, 1940s, the 1970s and 2000’s.
Alden suggests the poor performance was “because inflation was higher, corporate margins were pressured, and bonds were either falling in price and/or their yields were failing to keep up with inflation.”
The way to protect a portfolio in this scenario of high inflation, is to follow the three pillar strategy. Simply own energy assets, commodity assets and hard monies. Alden says that the 60/40 portfolio lacks real exposure to them, and is “heavily geared towards disinflation rather than inflation”.
Three Benefits of The 3 Pillar Portfolio Strategy
Lyn Alden’s three pillar Portfolio strategy is worthy of consideration for all investors. Let’s a take a look at the three main benefits:
1. Inflation Protection for Investors
- The portfolio is “geared toward the expectation of above-target inflation” and currency debasement. Commodities, their producers and hard monies all do best in periods of inflation.
2. Balanced Risk and Reward
- Alden’s M1 Portfolio focuses on domestic and global dividend producing, growth stocks. They are all established companies that can be held for 10 years or more. And they all have upside in their share price and dividend potential.
3. Energy and Commodity Producers are Unloved
- As Rick Rule’s Investment Strategy, you need to love the most hated stocks.
- Energy and Commodities like Oil, gas, gold and silver are unloved and under utilized in everyday portfolios. In periods of high inflation, these assets will gain more attention. Commodity prices will surge and these unloved assets will feel wanted again. As retail investors pile in to show some love too.
Final Thoughts
Lyn Alden’s three pillar portfolio strategy is geared towards above-target inflation. Big disinflationary growth assets generally don’t perform well when energy prices are high, interest rates remain high and inflation continues to rise.
A combination of dividend producing domestic and global growth stocks, cash equivalents and energy/commodity producers and hard monies can help navigate a broad variety of market conditions. But most importantly, these assets can thrive in inflationary periods.
Alden’s three pillar portfolio strategy makes sense for macro investors looking for an edge. 60/40 investors may want to take a closer look and protect themselves from structural inflation.
If you find this strategy interesting, I suggest you visit Lyn Alden’s website and sign up for her newsletter. It is fantastic and a highlight when it hits my inbox. Her media appearances are always great and if you haven’t read her book Broken Money, it’s a must read. Lyn is a Macro Genius and worth learning from the best in the business.
M. Moneyman
Resources
Lyn Alden’s work is worthy of a deep read and analysis. The following reading list was used to compile this post. They are great to study and hopefully, improve your own investment strategy. By spending time disassembling the following posts, I have a better take on Alden’s strategy. But it has also informed my approach to my current portfolio.
- Macrovoices Podcast: Lyn Alden on Energy Security and Precious Metals
- Lynalden.com: Precious Metals Investing
- Lynalden.com: Reasons to Buy Gold
- Macrovoices Podcast: Lyn Alden on Energy Inflation
- Lynalden.com: Top Stocks to Buy
- Lynalden.com: January 2024 Newsletter (3 Pillar Strategy)
- Twitter.com: Lyn Alden Tweet on Cash Equivalents
- Forbes.com – Inflation is a Fever article
