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The 2026, hopefully “most weather,” sample SMC portfolio

I wouldn’t dare to call anything I come up with as an “all weather” portfolio, but I have constructed a SMC portfolio idea discussed on the podcast with multiple scenarios in mind and as outlined in the notes below. Again, this portfolio is a mere idea meant as a discussion point for the year ahead - its performance could prove comical relative to benchmarks or stomp those benchmarks next year, let’s see.

For the benchmarks, we’ll use the US S&P 500, the MSCI World, the AI Basket and possibly others. Notes are as are as follows:

• Overall, the cash allocation is somewhat high and the US equity market allocation is idiosyncratic (equal weight S&P 500 vs. market cap weighted) and very low with the implicit concern that the US market is overvalued, especially some of the megacaps that enjoy passive inflows, and could be in for a correction or worse within the year next year*.

• Europe at 10% is not a dramatic allocation, though Japan at 10% is a bit heavy - a firmer JPY might have to do some of the heavy lifting for Japan to outperform strongly next year. Similarly, the EM allocation of 10% is an indirect forecast of a weaker US dollar, which might require some kind of significant liquidity easing in the year ahead from the US Fed/Treasury.

• We only include a 15% allocation to bonds and only via quite long duration (the TLT ETF). Our assumption here is that rate volatility will not be allowed beyond a certain point, in which case the chief risk would be that this is a dead weight or slightly worse. On the flip-side, if the economy is exceptionally weak and much hated bonds suddenly come alive as a safe haven again, it might offer slightly more convex upside.

• A 10% allocation to crypto is an attempt to over-allocate to an area that might provide some upside convexity in any number of scenarios. One scenario could be something like a credit chaos/private equity blowup scenario that sparks a major easing in the US financial system plumbing that doesn’t lean heavily on Fed rate cuts, but more on systemic plumbing and a flood of liquidity. Another is a weak economy that sees more significant Fed easing than currently expected, together with some of those liquidity injections. And finally, there is the scenario in which the economy and inflation begin running hot again and rates remain a bit inappropriately low and even capped at the long end of the curve. I would like to have included a 6% allocation to Bitcoin and 4% allocation to a broader crypto universe, but there are no liquid listed ETF instruments for that - I suspect the next big crypto surge, if any, will see that change.

• The precious metals allocation looks very cautious for the gold bugs - it’s more of a bias/call on gold’s possibly limited upside potential relative to prices for other assets. Silver looks a heavy allocation by comparison.

• European based investors: look for UCITS based and Europe-listed versions of all ETFs, and a European investor’s allocation to bonds would be in Euro-based ones.

*On the podcast I discussed a two-phased strategy for (possibly) converting the 20% cash allocation to US, by selling ATM put options for half of that allocation in the SPY ETF should the VIX reach 30 and the other half of the allocation into the SPY ETF should the VIX reach 50. Entirely unknown is whether either of these would result in a position being established - if not, the strategy could supposedly be repeated as many times as the triggers are reached.

Chart of the Day Year - Western Digital

We still have a few trading days of the year left, but just wanted to point out the very strongest stock of the year in the case of the S&P 500, Western Digital, which is up 294% YTD through Monday’s close, well ahead of second place, its competitor Seagate, which is up a “mere” 233%. Micron and Robinhood Markets are hot on the heels her at 230% and 228%. Western Digital’s strong performance came after years of indifferent performance on average, ending 2024 down more than 25% from its peak within the year and up about 12% on the year, but down 45% from its highest prior yearly close back in…2014 a decade earlier. Always worth remembering that cycles change, especially in cyclical stocks. Sure, Western Digital could have a strong year ahead on the ongoing need for AI-related storage solutions, but it is unlikely to repeat its performance atop the S&P 500. And what will top the S&P 500 next year - something in tech, biotech, energy, materials, crypto-adjacent or something else entirely? I would suspect it might have a US supply chain/national security angle or “nuclear energy” if it isn’t in tech again, but let’s see.

Questions and comments, please!