Are Your Portfolios Antifragile?

Nassim Taleb’s Antifragile: Things That Gain From Disorder, aside from enlightening readers on one of the most insightful and applicable concepts in finance and beyond, has a critical lesson for every investor.

Briefly, one of Taleb’s key points is that things which are fragile are defined as being harmed by disorder (or volatility).  Common wisdom is that the opposite of being fragile is being robust, or being unharmed by disorder.  Taleb’s key insight is that the opposite of being fragile is instead being antifragile, or benefitting from disorder (or volatility).  He goes on to describe a continuum, or triad, of conditions which range from Fragile to Robust to Antifragile.  So where do different investors fit in this continuum? 

Glaringly, those in the de-accumulation phase of their investment lifecycle are the most fragile.  As clients sell assets to generate income, fluctuations in asset prices have a detrimental effect on their portfolio values.  Specifically, the more volatility their portfolio is subjected to, the quicker they will run out of money.  We all know that protecting retirees from portfolio volatility is critical to their success, and this is because they are in a Fragile position.

Those who are invested in the market and have reasonably long liquidity horizons would best be described as Robust to volatility.  These investors aren’t going to end up worse off in the long run if they can refrain from taking withdrawals during a period of portfolio decline, but it also wouldn’t be accurate to characterize them as benefitting from it.  Many investors think being Robust to volatility is the best they can do, and position accordingly.  Introducing them to the concept of Antifragility could help improve their outcomes.

Those investors who are accumulating assets are in the best position to have an Antifragile portfolio.  Contributing regularly to retirement accounts allows for the dollar cost averaging effect we’ve discussed previously, and it is precisely this effect that benefits from volatility.  Specifically, the more volatility their portfolio is subjected to, the higher their long-term returns will be.

So how can we help move the Fragile and the Robust toward a more Antifragile portfolio on the continuum?  One way is through intelligent rebalancing.  By applying a rigorous methodology to buying relative losers with proceeds from relative winners, rebalancing can capitalize on both the upside and downside volatility of individual portfolio elements.  Over time, rebalancing in this way will lead to increased returns specifically due to that volatility.  Antifragility, or benefitting from volatility, will be a brand new concept to most investors - one that can provide them a lot of intellectual and financial value.

Having a fully invested portfolio and a longer liquidity horizon no longer has to mean settling for Robust in Taleb’s continuum.  Adding a rebalancing methodology that considers upside and downside volatility distinctly can make all of your portfolios less Fragile, and more Antifragile.


Dave Donnelly is the Founder and CEO of Strategic Alpha, a rebalancing service dedicated to helping financial advisors improve client outcomes.