Use this 2x2 matrix to learn which investments will shine this year

In the past 40 years, we’ve seen only two types of U.S. economy. A new and different economy could be right around the corner. What is it?

If you’re familiar with San Franciso, you’re familiar with microclimates.

On a summer day, it may be 55 deg. in the City, 75 deg. in Alameda (where I live), and 95. deg in Concord (where my son goes to school).

It’s no wonder that the #1 memento for a San Francisco tourist is a sweatshirt. You think California summer, and you think hot. Nope. Fog covers the City, pulled on shore by the Bay Area’s inland heat. And it’s cold.

The simple lesson? Be ready for all kinds of weather.

All weather investing portfolios

This analogy has infiltrated investment-speak over the years.

The most direct is Ray Dalio’s All Weather investment portfolio (1996). It holds roughly 30% stocks, 40% long-term bonds, 15% short-term bonds, 7.5% gold, and 7.5% commodities.

Other examples:

  • Permanent portfolio (1982) from Harry Browne, holding 25% stocks, 25% long-term bonds, 25% cash, and 25% gold.
  • Dragon portfolio (2020) from Chris Cole. It holds 20% stocks, 20% long-term bonds, 20% gold, 20% commodity trend, and 20% long volatility.

If this post is getting complicated fast for you, do not worry.

I name these investment portfolios for one reason. Smart investors with very long investment horizons consider all types of U.S. economies. Or as I will call them: economic regimes.

What are the four economic regimes?

Economic regimes depend on two factors that interact: Growth and Inflation.

If we match levels of Growth (positive or negative) with Inflation (yes or no), we arrive at four economic regimes:

  • Expansion (real): economic growth and no price inflation
  • Expansion (nominal): economic growth with price inflation
  • Recession: economic decline and no price inflation
  • Stagflation: economic decline with price inflation

Assessing recent history:

  • For the last ~40 years (1980 to 2021), we’ve swung between expansion (real) and recession.
  • 2021/2 included 18 months of expansion (nominal-with inflation).
  • And, as we look to 2023, we are teetering between continued expansion (nominal) and stagflation.

Why is this important?

Consider these questions:

  1. What type of investments work best in expansionary times? Stocks.
  2. How about in recessions? Bonds.

This is good: We have access to stocks and bonds in our 401Ks, IRAs, and brokerage accounts.

  1. What about expansionary times with inflation? Stocks, yes, but also (and more so) commodities!
  2. How about during stagflation? Commodities again. And gold.

This is a problem! Most investors can’t access commodities and gold as investments.

Inflation really messes things up. If it sticks around, we need alternatives to stocks and bonds for continued investment success.

Your easy-to-understand 2x2 matrix

In my 20s, I worked for a manager who looked at life through 2x2 matrices. Every situation. Every decision. Everything could be framed by a 2x2.

Well, so can economic regimes.

The four quadrants that define our four economic regimes are defined here:

For those interested in my research, here is a link to the key chart.

And for even more excruciating details, refer to this.

All Weather portfolios make a comeback

I mentioned early on that several all-weather portfolios do exist. But few know about them, for these reasons:

  • They have been out of favor because they have underperformed. We’ve experienced zero inflation in the past 40 years. So, commodities and gold have been a drag on investment returns.
  • We aren’t educated on all-weather portfolios. The mutual fund industry -and the stock/bond funds it touts- has grown massively in the last 40 years. And this aligns with just two of four economic regimes. Our own short-term thinking limits us.
  • Until recently, portfolios with commodities and gold have been hard to set up. Only hedge funds, family offices, and other “big money” played in these assets.

Portfolios that accommodate all economic regimes may have been out of favor for 40 years. But, they may soon make a comeback.

2022 and 2023 appear to be years of economic change. It’s time to learn more!

And, wouldn’t it be cool if there was a more fluid all-weather portfolio?

What if you could move money to the best performers when economic regimes changed?

That’s what I do at

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Brian Herriot, Fast Follow Investor @brianh