How to Grow and Protect Generational Wealth for the Next 100 Years
by David Wiitala using ChatGPT Deep Research - general information only, not to be used as advice
Overview of the Dragon Portfolio
The Dragon Portfolio is a long-term investment strategy proposed by Christopher Cole of Artemis Capital Management. It is designed as a "100-year portfolio" intended to thrive through all economic regimes – from inflationary booms to deflationary busts – by combining diverse asset classes. Cole introduced this concept in his 2020 whitepaper “The Allegory of the Hawk and Serpent: How to Grow and Protect Wealth for 100 Years.” The name comes from an allegory: the Serpent symbolizes long periods of economic growth and stability, while the Hawk represents the disruptive periods of crisis and change that eventually swoop in. The Dragon Portfolio blends both types of assets (serpent and hawk) to create a mythical “dragon” that can survive and prosper through generational cycles of boom and bust (Hawk and Serpent Allegory: Wealth Growth & Protection).
In simple terms, the Dragon Portfolio is an all-weather asset allocation. It holds five uncorrelated asset classes, each with a specific role. By design, some parts of the portfolio will excel when others struggle, smoothing out performance over time. Cole’s research showed that such a portfolio, if maintained and rebalanced consistently, would have significantly outperformed more traditional portfolios on a risk-adjusted basis over the last century (Hawk and Serpent Allegory: Wealth Growth & Protection).
Components of the Dragon Portfolio and Their Purpose
Cole’s Dragon Portfolio consists of five core components, each roughly 20% of the allocation (exact weights are slightly different but close to equal). Each component is chosen for a distinct economic purpose (Hawk and Serpent Allegory: Wealth Growth & Protection):
U.S. Equities (~24%) – Growth Engine: Stocks represent the “serpent” assets that thrive during periods of economic growth, stability, and technological progress. This portion drives returns during secular booms (e.g. the post-WWII expansion and 1980s–2000s bull markets). Equities benefit from favorable demographics, productivity gains, and corporate earnings growth. In the Dragon Portfolio, stocks provide upside during these prosperous regimes, participating in rising asset prices (Hawk and Serpent Allegory: Wealth Growth & Protection).
Fixed Income (U.S. Treasury Bonds, ~18%) – Deflation Hedge: High-quality bonds (like U.S. Treasuries) tend to do well in deflationary periods, recessions, or flight-to-quality panics. When growth falters or crises hit (the “left wing of the Hawk” in Cole’s allegory), interest rates usually fall and bond prices rise. This was seen in events like the Great Depression and 2008 crash, when Treasuries rallied as stocks collapsed. In the Dragon Portfolio, the bond segment provides stability and gains during economic contractions or debt deleveraging, offsetting equity losses.
Gold (~19%) – Inflation and Currency Protection: Gold is included as a store of value that shines during inflationary or currency-devaluation regimes. In periods of high inflation, stagflation, or monetary crisis, gold prices historically surge (e.g. the 1970s “stagflation” era). Gold acts as insurance against fiat currency debasement and negative real yields. In Cole’s framework this is a “Hawk” asset – it performs when paper assets (stocks/bonds) are losing purchasing power. Thus, gold in the portfolio helps preserve wealth during inflationary spikes or currency crises (Hawk and Serpent Allegory: Wealth Growth & Protection).
Commodity Trend Following (~18%) – Diversified Real Asset Momentum: This segment involves managed futures or systematic trend-following strategies in commodity markets. Essentially, professional funds (CTAs) go long or short commodities (and other asset futures) based on price trends. The purpose is to profit from major price swings – for example, riding oil and commodity prices up during an inflation boom, or shorting them during a collapse. Trend-following commodities tend to do well in volatile or strongly trending environments (whether inflationary or deflationary). They provided gains in scenarios like the 1973 oil shock and can profit from either rising or falling commodity markets. In the Dragon Portfolio, this component adds an adaptive **“active” strategy that can perform in either extreme, complementing static gold and bond holdings (Hawk and Serpent Allegory: Wealth Growth & Protection). It’s another “hawk” style asset meant to make money when traditional assets surprise to the upside or downside.
Long Volatility/Tail Risk (~21%) – Crisis Insurance: This is perhaps the most unconventional piece. Long volatility strategies profit from surges in volatility and market tail events – essentially, they are like holding insurance that pays off in a market crash or sudden shock. Examples include holding long-dated options, protective put strategies, or funds that go long the VIX (volatility index) or volatility derivatives. These positions typically lose modest amounts in quiet markets (insurance premium cost) but explode in value during market panics or crashes (when volatility spikes). Cole includes ~20% in active long volatility as a dedicated hedge for market crises – the “right wing of the Hawk” in the allegory (Hawk and Serpent Allegory: Wealth Growth & Protection). This component cushions the portfolio during equity bear markets (for instance, it would have gained in 1987’s crash, 2008, or the 2020 COVID meltdown). Its purpose is to not only protect capital in a crash, but actually produce positive returns in those rare “rainy years,” or even “rainy decades,” of turmoil (Hawk and Serpent Allegory: Wealth Growth & Protection).
Each of these five segments has a role that complements the others. Equities and bonds represent the traditional core (growth and some defense), while gold, commodity trend, and long volatility are the unconventional diversifiers that shine when stocks and bonds falter. Cole’s key insight is that by holding meaningful allocations to these non-traditional assets, the portfolio can achieve true diversification across any market environment – something a standard stock-and-bond mix cannot do to the same degree. As Cole puts it, “find assets that can perform when stocks and bonds collapse, and boldly own them regardless of short-term performance” (Hawk and Serpent Allegory: Wealth Growth & Protection). In other words, the Dragon Portfolio is built on the idea that defensive assets are not just for a rainy day, but for a rainy decade (Hawk and Serpent Allegory: Wealth Growth & Protection).
Economic Regimes and the Logic Behind the Strategy
The Dragon Portfolio’s design is deeply rooted in historical economic regimes. Christopher Cole analyzed roughly the last 90+ years of market history and identified alternating periods – or “secular seasons” – that favored very different asset types. The portfolio explicitly balances assets that perform in “Serpent” periods of growth against those that excel in “Hawk” periods of upheaval (Hawk and Serpent Allegory: Wealth Growth & Protection).
Serpent (Growth) Regimes: These are long stretches of stability, credit expansion, and prosperity. Examples include the post-WWII boom (1947–1963) and the Great Moderation/tech boom (1984–2007). In these periods, equities and other pro-growth assets perform exceptionally well as corporate profits rise and inflation is moderate. Investors in these eras can become complacent, assuming stocks and bonds will continue to steadily appreciate. The Dragon Portfolio’s equity portion capitalizes on these good times. However, Cole warns that as these booms mature, they often sow the seeds of their own downfall through excess leverage, asset bubbles, and “greed” – akin to the serpent eventually devouring its own tail (Hawk and Serpent Allegory: Wealth Growth & Protection).
Hawk (Crisis) Regimes: These represent the turbulent transitions when the long bull market ends – either through a deflationary bust or an inflationary spiral (Cole metaphorically describes the Hawk as having a “left wing” of deflation and a “right wing” of inflation). Historical examples: the Great Depression/World War II era (1929–1946) was a deflationary hawk phase, and the 1970s stagflation (1964–1983) was an inflationary hawk phase. During such regimes, traditional portfolios can suffer deeply: stocks might crash or stagnate for years, and bonds can lose value in real terms if inflation runs hot. This is when the Dragon Portfolio’s hedges (gold, trend-following, long volatility, bonds) come to the forefront. In a deflationary crisis (hawk’s left wing), long Treasuries and long volatility strategies soar in value, offsetting stock losses. In an inflationary crisis or stagflation (hawk’s right wing), gold and commodity trend-following post strong gains (as seen in the 1970s, when gold prices skyrocketed) (Hawk and Serpent Allegory: Wealth Growth & Protection). By having these “hawk” assets, the Dragon Portfolio can “not lose capital on either wing” of these revolutionary periods (Hawk and Serpent Allegory: Wealth Growth & Protection).
The Balance (The Dragon): By combining both sets of assets, the portfolio aims to create an aggregate that performs in all environments. Cole describes the Dragon as “the equilibrium between the juxtaposed forces of the Hawk and the Serpent” (Hawk and Serpent Allegory: Wealth Growth & Protection). In practice this means the portfolio might never be the top performer in any single year (some part is always lagging), but it also avoids the devastating losses that a one-dimensional portfolio can experience when the economic climate shifts. The Dragon Portfolio “makes money in the middle” during normal times, and becomes especially explosive in the extremes (the wings of the distribution) (). It is constructed such that for every major macro scenario, at least one or two parts of the portfolio will be thriving:
In booming growth with low inflation (like 1980s–1990s), equities (and possibly bonds) do very well – the portfolio participates via its 24% equity stake.
In stagflation or inflationary boom (e.g. 1970s or potentially the 2020s), gold and commodity trend strategies yield big gains, offsetting weak stocks/bonds.
In deflationary depression or market crash (e.g. 1930s or 2008), bonds and long-volatility positions would soar in value, cushioning or even exceeding the losses elsewhere.
Even in moderate, range-bound periods, the mix of assets is designed so that returns don’t stray far from zero on the downside. The portfolio is intended to “not lose money during periods of turbulent change” and to recover more quickly from drawdowns (Hawk and Serpent Allegory: Wealth Growth & Protection).
Cole essentially built the Dragon Portfolio as an answer to a thought experiment: If you had to lock in one portfolio for 100 years (through multiple generations), how would you allocate to ensure survival and growth through vastly different eras? (Hawk and Serpent Allegory: Wealth Growth & Protection) The answer was to diversify across economic regimes, not just across asset classes in the contemporary sense. Most investors today hold many different assets that all implicitly bet on the same regime (for example, a 60/40 stock-bond portfolio bets on a continuation of moderate growth with low inflation). By contrast, the Dragon Portfolio explicitly includes assets that profit from completely opposite conditions. This regime-based diversification is the logical underpinning: it acknowledges that the future may not look like the last 40 years, and positions the investor to prosper whether we face inflation, deflation, war, peace, tech innovation, or financial crisis.
As Cole wrote, “the key to a portfolio that stands the test of time is diversification over a century, not just a decade” (Hawk and Serpent Allegory: Wealth Growth & Protection). That means secular non-correlation is prized over short-term returns. The Dragon Portfolio prioritizes resilience and balance so that wealth endures across generations of unpredictable change.
90-Year Backtested Performance (1928–2019)
Christopher Cole didn’t just theorize this allocation – he backtested the Dragon Portfolio over the last 90+ years to see how it would have fared against traditional portfolios. The results were impressive. According to Cole’s research, the Dragon Portfolio substantially outperformed conventional portfolios on a risk-adjusted basis over 1928–2019, while keeping drawdowns (losses from peak to trough) at very tolerable levels (Hawk and Serpent Allegory: Wealth Growth & Protection).
In Cole’s backtest, the Dragon Portfolio (with the 24% equity, 18% bonds, 19% gold, 18% commodity trend, 21% long vol mix) delivered approximately the same compound return as a classic 60/40 portfolio of stocks/bonds, but did so with only about half the volatility and roughly half the maximum drawdown of the 60/40 (). In other words, it achieved similar gains with far less risk. Moreover, if the Dragon Portfolio was scaled up to take on the same volatility as an all-stock portfolio, its returns would have far exceeded those of 100% stocks. Cole reports that when adjusted to a ~15% annual volatility level (comparable to stock market risk), the Dragon Portfolio compounded at about +14.4% per year over 90 years (Hawk and Serpent Allegory: Wealth Growth & Protection) – a remarkably high return, reflecting its strong performance across different market eras.
To put the performance in perspective, let’s compare the Dragon Portfolio to a traditional 60/40 portfolio and a 100% equity (S&P 500) strategy over the long run:
Table 1: 90-Year Performance Comparison (1928–2019)
Portfolio Annualized Return (CAGR) Volatility (Std. Dev.) Sharpe Ratio (Risk-Adjusted Return) Max Drawdown (Peak Loss) Dragon Portfolio ~8% (similar to 60/40) () () ~6% (very low) ~0.8–1.0 (about 2× 60/40) () ~–20% () (shallow) 60/40 Stock/Bond ~8% (around historical avg) () ~10% ~0.4–0.5 () ~–45% (The Performance of the 60/40 Portfolio: A Historical Perspective) (Great Depression) 100% Stocks (S&P 500) ~10% (S&P 500 Average Returns and Historical Performance) ~15–18% ~0.3–0.4 (The Performance of the 60/40 Portfolio: A Historical Perspective) ~–83% () (Great Depression)
Sources: Backtested performance from 1928–2019 based on Artemis Capital Management research (Hawk and Serpent Allegory: Wealth Growth & Protection) (). Traditional portfolio stats from historical U.S. stock and bond data (S&P 500 total return and long-term Treasury bonds) (S&P 500 Average Returns and Historical Performance) (The Performance of the 60/40 Portfolio: A Historical Perspective) (). Sharpe ratio here is a measure of return per unit of volatility (for long-term context, the 60/40 portfolio’s Sharpe was about 0.3–0.5, while the Dragon’s was roughly double that) ().
Interpretation: Over roughly 90 years, the Dragon Portfolio achieved comparable growth to a 60/40 portfolio (on the order of high single-digit annual returns), and not far from the return of 100% stocks, but with far less volatility and downside risk. Its annual volatility (~6% by estimate) is extremely low – meaning the portfolio’s yearly returns fluctuated much less than a pure equity portfolio (which had ~15% or higher volatility). This makes the Dragon’s Sharpe ratio (a risk-adjusted return metric) very high – roughly twice that of the 60/40 portfolio (). In practical terms, an investor in the Dragon Portfolio would have experienced a much smoother ride: fewer big swings and quicker recovery from losses.
The max drawdown column is striking. The worst peak-to-trough loss for the Dragon Portfolio over the 90-year test was on the order of –20% (roughly one-fifth of the portfolio value) (). By contrast, a 60/40 portfolio’s worst historical loss was about –45% (nearly half, during the Great Depression) (The Performance of the 60/40 Portfolio: A Historical Perspective), and 100% U.S. equities at one point lost about –83% of their value in the 1929–1932 crash (). Even in more modern times, stocks lost around –56% in the 2007–2009 crisis. The Dragon Portfolio’s diversified hedges greatly limited such deep drawdowns. In fact, Cole notes that the Dragon had roughly half the max drawdown of a 60/40 or risk parity portfolio over the long term ().
It’s also worth noting consistency: Cole found that the Dragon Portfolio achieved double-digit annual returns in all four “generational seasons” (the major economic eras of secular boom and bust) (). Whether it was the post-war boom, the 1970s stagflation, the 1980s–90s bull market, or the post-2008 era, the portfolio delivered strong positive returns in each regime. This underscores the core claim that it truly is regime-proof – when one part was struggling, other parts were thriving, resulting in a solid overall performance through each cycle.
In summary, the 90-year backtest suggests the Dragon Portfolio would have grown wealth robustly while dramatically reducing risk. Cole emphasizes that its return-to-risk ratio was approximately 0.98, about 2× higher than a classic 60/40 portfolio’s over the same period (Hawk and Serpent Allegory: Wealth Growth & Protection) (). An investor could even have applied leverage to the Dragon Portfolio (to target higher returns) and still ended up with a superior risk-adjusted outcome than stocks or 60/40. This is a crucial point: because the Dragon Portfolio is so well diversified, one can “safely leverage” it to meet a desired return without taking on the kind of tail risk that an all-stock portfolio has (). Not many portfolios allow that. As Cole quips, the Dragon Portfolio in a normalized form had the “highest batting average” (Sharpe ratio) and “lowest strikeouts” (drawdowns) of the strategies examined (Hawk and Serpent Allegory: Wealth Growth & Protection).
Practicality and Implementation for Retail Investors
A natural question is: how can an everyday investor implement the Dragon Portfolio in real life? While the concept is sound, some components (like long volatility strategies) are not as straightforward to access as buying an index fund. Here we evaluate the practicality, including asset access and costs, for a retail investor:
Equities (24%): This part is easy to implement. A retail investor can buy a broad stock index fund or ETF (e.g., an S&P 500 index fund or total stock market fund) at very low cost. Equity index funds have minimal fees (often <0.1% annually) and high liquidity. So, the equity piece poses no practical challenge – it’s the same as in any portfolio.
Treasury Bonds (18%): Also straightforward. An investor can use a Treasury bond ETF or a high-quality bond fund. For example, a long-term Treasury ETF (like ones tracking the Bloomberg Barclays US Treasury Index) can replicate the bond exposure Cole assumes (). Expense ratios for passive bond funds are low (~0.05–0.15%). One consideration: Cole’s analysis often assumes long-duration Treasuries (which react strongly in deflationary periods). A retail investor should ensure they hold sufficient duration (e.g., 20+ year Treasuries) to get the defensive benefits. This is accessible through ETFs like TLT (20+ Year Treasury) or similar. Costs and access here are not an issue; U.S. Treasuries are widely available and liquid.
Gold (19%): Physical gold can be held via bullion or coins, but most retail investors will find it easier to use a gold-backed ETF (such as GLD or IAU) which tracks gold prices. These have moderate fees (~0.25% or less) and closely reflect gold’s performance. Gold ETFs are very liquid. Alternatively, one could invest in gold through a fund or trust. The key is to treat gold as a long-term strategic holding, not a short-term trade. Implementing a ~20% allocation to gold is unusual for many investors, but it’s quite feasible. One should be mindful of storage costs if holding physical gold or the expense ratio of the ETF, but otherwise access is straightforward.
Commodity Trend Following (18%): This is more challenging for a retail investor, because it’s an active strategy typically executed by commodity trading advisors (CTAs) or managed futures funds. Essentially, you need a fund that will go long or short various commodity (and possibly financial) futures based on trend signals. Retail access to such strategies has historically been through either commodity index funds (which are not trend-following, just passive long commodities) or through managed futures mutual funds and ETFs. The good news is that in recent years, there are some funds/ETFs that attempt to replicate CTA trend-following indexes. For example, there are mutual funds following the SocGen Trend Index or ETFs that use managed futures strategies. Cole’s whitepaper suggests using an index like the SocGen CTA index or the HFRX Macro Diversified Index as a proxy (). A retail investor could consider funds like DBMF (an ETF that aims to capture managed futures returns) or mutual funds from AQR, AlphaSimplex, etc., which pursue trend following. Cost: These funds are more expensive than plain index funds – fees might range from 0.75% to 1.5% annually, and performance can vary. Also, they may have higher minimum investments if it’s a private fund. Another approach for an experienced individual is to manage a simple trend-following system themselves (requires expertise and trading futures, which isn’t practical for most). In summary, the commodity trend piece is implementable but requires finding the right product. It introduces higher fees and complexity compared to standard assets. Retail investors should do due diligence on managed futures funds or consider a smaller allocation if concerned about cost. Tax: Keep in mind, futures-based funds can have different tax treatment (K-1 forms, etc.), which is another consideration.
Long Volatility/Tail Risk (21%): This is arguably the trickiest part for a retail investor to implement. Long volatility strategies often involve options or VIX futures, which typically require active management and can be costly to carry. There are a few avenues:
Specialized tail-risk funds or ETFs: For instance, the Cambria Tail Risk ETF (TAIL) is one example that holds a treasury portfolio plus some put options as insurance. There are also mutual funds and hedge funds (like Universa, run by Nassim Taleb’s protege, or Artemis’s own funds) that specialize in tail hedging. However, many tail-risk or long-volatility funds are aimed at institutions and may have high minimum investments or fees (2% management fee and performance fees are not uncommon in this space).
DIY via options: A skilled retail investor could allocate a portion of their portfolio to buying protective puts on an equity index or to long-dated VIX call options, etc. But doing this effectively is non-trivial – options decay over time, and maintaining a long-vol position requires rolling contracts and deciding how far out-of-the-money to buy, how much to spend, etc. It can be a drag on returns if done poorly. It’s essentially like paying an insurance premium continually; one hopes it pays off big in a crash. Without a professional manager, it’s challenging to get the timing and sizing right.
Proxy with Treasuries or low-beta assets: Some retail investors might try to approximate “long volatility” by using things like long-term Treasuries or even cash as a buffer, since those often gain or hold value in equity crashes. However, true long volatility has a convex payoff (it increases in turmoil, rather than just holding steady). Long Treasuries already exist as the 18% bond slice, so that alone might not replicate the unique benefit of a long vol strategy (for example, in the March 2020 COVID crash, long volatility funds had massive gains while Treasuries rose more modestly).
In terms of cost, long volatility is by nature a cost center in calm times – you will see small steady losses most years (similar to paying insurance premiums). Funds that do this typically will lose a few percent per year in quiet markets, then jump dramatically in a crisis (e.g., +40% or more in a market crash) (Episode #317: Chris Cole, Artemis Capital Management, “You Want To Diversify Based On How Assets Perform In Different Market Regimes” - Meb Faber Research - Stock Market and Investing Blog). An investor must be emotionally prepared for that drag and not chase performance (i.e., not abandon the hedge just because it’s losing during bull markets). As Cole emphasized, you have to “boldly own them regardless of short term performance” (Hawk and Serpent Allegory: Wealth Growth & Protection). The practical approach might be to allocate a smaller percentage if 20% is too costly, or to use a fund like an all-in-one solution that includes long vol. Some newer mutual funds combine equity and an options overlay to simplify this for investors.
Overall, for a retail investor, the long vol allocation is the least accessible piece. The most realistic implementations would be either a dedicated tail-risk mutual fund/ETF or hiring a managed account with a firm that does long-vol strategies. This likely involves higher fees (1-2%) and possibly performance fees. However, given that this part of the portfolio is meant to save you from huge losses in a crash, some investors might find the cost worth the peace of mind.
Rebalancing and Maintenance: Implementing the Dragon Portfolio isn’t a one-time set-and-forget if done manually. The investor would need to rebalance periodically (e.g., annually or when allocations drift significantly) to maintain roughly the 20% slices. That means after a big stock rally, you’d trim equities and add to other categories; after a volatility event where long vol spiked, you’d take profits from that and redistribute, etc. Rebalancing keeps the risk balanced. This is practical to do with most brokerages, though transaction costs are minimal these days (but be mindful of taxes in a taxable account when rebalancing across very different assets).
Costs Summary: The traditional parts (stocks, bonds, gold) are low-cost to implement via index funds. The diversifiers (trend following and long vol) will increase the overall portfolio cost. If each of those is ~20% allocation and carries ~1% fee, that adds ~0.4% to the total portfolio’s weighted expense. So the total portfolio might cost on the order of 0.5%–1.0% per year in fund fees (depending on choices) – higher than a simple 60/40 of index funds, but not outrageous given the strategy. There may also be trading costs or slippage in those strategies, but presumably the fund structures account for them.
Accessibility: All components have some vehicle accessible to retail, though simplicity varies. Cole himself noted that a “modern implementation” is possible with a combination of hedge funds and passive indices () (). For an individual, this might mean using index ETFs for the easy parts and a couple of specialized funds for the rest. One could also see if any advisor or multi-strategy fund already offers a packaged “Dragon-like” portfolio. There isn’t a widely known single ETF that exactly mirrors the Dragon Portfolio (as of now), but an investor could approximate it with, say:
24% in a total stock index,
18% in a Treasury bond ETF,
19% in a gold ETF,
18% in a managed futures ETF/mutual fund,
21% in a tail-risk or long-vol fund (or a mix of long-dated puts and a small allocation to something like the VIXY ETF for volatility).
Implementing the last two in a tax-advantaged account (like an IRA) could make sense, to avoid annual tax on gains from futures or options.
Realistic Considerations: For a retail investor, discipline is paramount. The Dragon Portfolio will often have parts that look like they are “losing money” in the short run (for example, in a bull market, the long vol sleeve might be steadily bleeding). It may underperform a stock-heavy portfolio in extended rallies. An investor must remember the purpose of each part and resist the urge to drop the hedges when they seem like a drag. Cole stresses that timing these regimes is nearly impossible, so the strategy is to always hold the diversifiers even when they’re out of favor (Hawk and Serpent Allegory: Wealth Growth & Protection) (Hawk and Serpent Allegory: Wealth Growth & Protection). This could be emotionally difficult for some. Practically, a retail investor should size the positions in a way they can stick with – perhaps starting with smaller allocations to the complex pieces if needed, and increasing as they get comfortable.
In conclusion, while the Dragon Portfolio is more complex than a typical 3-fund portfolio, it is implementable at a retail level today. The investor will need to venture beyond plain stock and bond indexes into some less common funds for managed futures and tail hedging. This comes with higher fees and the need for careful maintenance. But from a cost/benefit standpoint, gaining true diversification like this can be very worthwhile. As Cole’s research showed, a well-executed Dragon Portfolio could potentially offer a much smoother and reliable wealth growth path – a compelling prospect if one can overcome the practical hurdles.
Key Insights from Christopher Cole’s Whitepapers
Christopher Cole’s writings – including “The Allegory of the Hawk and Serpent” and earlier papers – provide the philosophical foundation for the Dragon Portfolio. Here are some of his key arguments and how they relate to the portfolio’s structure and intent:
Conventional Portfolios Suffer from Recency Bias: Cole argues that most investors are heavily biased by the last 40 years of market history, a unique period (1980s–2010s) of disinflation, booming stocks, and falling interest rates (). This led to the popularity of the 60/40 portfolio and heavy reliance on equities and bonds (which both did well in that era). However, he notes that this is an anomaly in a 100-year context – different eras (like the 1970s or 1930s) would wreak havoc on such portfolios. In his view, classic portfolios and even many institutional strategies (risk parity, etc.) are too reliant on one regime continuing (). The Dragon Portfolio is his answer to this bias: it is explicitly constructed by studying over a century of data to include assets that many today ignore. By looking at long-term history, Cole identified the “missing” pieces (gold, commodities, long vol) that traditional allocations underweight. This ties into his point that true diversification requires thinking beyond the recent bull cycle.
The Hawk and Serpent Allegory – Cycles of Wealth Creation and Destruction: In his whitepaper, Cole uses the vivid allegory of a Hawk and a Serpent. The Serpent represents humanity’s tendency during long prosperous times to become complacent and even self-destructive (devouring itself), while the Hawk represents the forces that end that prosperity abruptly, paving the way for renewal (Hawk and Serpent Allegory: Wealth Growth & Protection) (Hawk and Serpent Allegory: Wealth Growth & Protection). This allegory is drawn from mythology (even appearing on the Mexican flag with an eagle and serpent) and symbolizes the eternal cycle of markets – secular booms inevitably turn to busts and vice versa. Cole’s key argument is that an investor seeking to preserve wealth for generations must respect this cycle. The Dragon Portfolio essentially combines the hawk and serpent – meaning it holds both pro-growth assets and crisis-period assets at all times. The structure of the portfolio is directly tied to this philosophy: about half the portfolio is dedicated to assets for the “hawk” (crisis) phases, which is highly unusual compared to standard portfolios. Cole’s intent is to maintain what he calls “cosmic balance during changing economic times.” (Hawk and Serpent Allegory: Wealth Growth & Protection)
“Profit in a Rainy Decade, Not Just a Rainy Day”: One of Cole’s memorable lines is that most people think of defensive assets as things that help in a market drop (a rainy day), but history shows you need them for much longer storms – entire lost decades (Hawk and Serpent Allegory: Wealth Growth & Protection). For example, an investor in the 1970s or 1930s faced not just a one-day crash but a prolonged period of poor returns. Cole’s portfolio includes substantial defensive positions (long vol, gold, trend) precisely so that an investor could still make money even if an entire decade is challenging for stocks and bonds (Hawk and Serpent Allegory: Wealth Growth & Protection). This is a key argument: endurance through multi-year downturns is crucial. The Dragon Portfolio’s intent is to ensure that the investor doesn’t merely survive a crash, but can thrive through a protracted downturn in mainstream markets. This is why the allocations to hedges are so significant (not a trivial 5%, but on the order of 20% each). It reflects Cole’s view that one must prepare for “generational” storms, not just garden-variety volatility.
Heavy Allocation to Uncorrelated Alternatives: In The Allegory of the Hawk and Serpent, Cole states: “The key to superior portfolio returns is to make surprisingly large allocations to alternative assets that perform when stocks and bonds do not.” (Hawk and Serpent Allegory: Wealth Growth & Protection) This is a cornerstone of his argument. Many investors only dabble in alternatives (maybe a 5% gold allocation, or a small amount of options, etc.), which Cole believes is not enough to truly counteract stock/bond risk. His research indicated that the optimal mix was roughly 20% in each of those diversifiers (gold, long vol, commodity trend) (Hawk and Serpent Allegory: Wealth Growth & Protection). The structure of the Dragon Portfolio directly reflects this conviction – it boldly overweights non-traditional assets more than most would. Cole acknowledges this is “highly unorthodox” by conventional standards (Hawk and Serpent Allegory: Wealth Growth & Protection), but his argument is that historically this is what it took to survive all seasons. He frequently points out that diversification needs to be across independent return streams (not just dozens of equity positions that all crash together). By having truly uncorrelated assets (or negatively correlated in crises), the portfolio can compound more reliably. This ties to another of his concepts: “secular non-correlation” is more important than squeezing out every last bit of return in the short run (Hawk and Serpent Allegory: Wealth Growth & Protection).
Critique of the Sharpe Ratio and Traditional Risk Metrics: In his 2021 paper “Moneyball for Modern Portfolio Theory,” Cole criticizes the overreliance on Sharpe ratio as a measure of a strategy’s quality. A key argument he makes is that Sharpe ratio often penalizes exactly the kind of assets that the Dragon Portfolio employs (because they might have low average returns or frequent small losses, despite adding huge value in a crash) (Episode #317: Chris Cole, Artemis Capital Management, “You Want To Diversify Based On How Assets Perform In Different Market Regimes” - Meb Faber Research - Stock Market and Investing Blog). For instance, a long volatility fund might show a mediocre Sharpe ratio if viewed in isolation, because it loses small amounts most years; but in the context of a portfolio, it can dramatically improve the overall Sharpe by hedging tail risk. Cole quipped in an interview that “the Sharpe ratio is useless... It only measures the player, it doesn’t measure the player’s effect on a winning portfolio.” (Episode #317: Chris Cole, Artemis Capital Management, “You Want To Diversify Based On How Assets Perform In Different Market Regimes” - Meb Faber Research - Stock Market and Investing Blog). His approach is akin to a “team sport” view of investing: some assets are the star scorers (equities), others are like defensive players (long vol, etc.) – you need both to win championships (long-term wealth building). This philosophy influenced his development of a metric analogous to “Wins Above Replacement” (a baseball statistic) for portfolio components, highlighting how much each asset improves the whole portfolio (Episode #317: Chris Cole, Artemis Capital Management, “You Want To Diversify Based On How Assets Perform In Different Market Regimes” - Meb Faber Research - Stock Market and Investing Blog). The Dragon Portfolio is constructed on that insight: every piece earns its keep not necessarily by standalone Sharpe, but by its portfolio contribution. For example, long volatility might reduce overall Sharpe if held alone, but within the Dragon it increases the portfolio’s Sharpe by cutting downside risk dramatically (). Cole’s key point: don’t dismiss an asset just because it has a low standalone return; judge it by how it interacts with other assets. This argument supports why the Dragon Portfolio intentionally includes assets that many would consider “return drags” – because collectively they make the portfolio far stronger (higher return-to-risk).
The Cost of Hedging vs. The Cost of Not Hedging: In his earlier papers like “Volatility and the Alchemy of Risk” (2017) and “Volatility and the Prisoner’s Dilemma”, Cole outlines how the financial system often lulls investors into selling insurance (volatility) for steady income, creating a “false peace” that leads to moral hazard. He discusses how many strategies (short volatility, risk parity with leverage, etc.) can generate stable returns for long periods but carry hidden tail risks – akin to picking up pennies in front of a steamroller. One of his arguments is that paying for protection is often seen as a drag on performance, but failing to have protection can be far more costly when the regime shifts. The Dragon Portfolio embodies this philosophy by always paying a bit for protection (via long vol and trend strategies) so that it never faces ruin. Cole would argue that the peace of mind and avoidance of catastrophic loss more than compensates for the explicit costs. And indeed, his backtest shows that the portfolio still had strong returns net of those hedging costs. This challenges the common mindset of “all-in on stocks because over the long run they go up” – he’d counter that with examples like the nearly 25-year period it took for the Dow to regain its 1929 peak after the crash. His intent is to avoid losing decades. So the portfolio’s structure – with significant allocation to hedges – is a direct manifestation of his belief that hedging tail risk is not optional, but essential. In “Alchemy of Risk,” he metaphorically describes central banks and volatility sellers as alchemists trying to turn volatility into apparent safety; the Dragon Portfolio takes the opposite side of that trade, holding volatility as an asset to guard against the alchemists’ eventual failure.
Use of Leverage Once Properly Diversified: Another insight from Cole’s work (and evident in the Dragon strategy) is that once you have a truly balanced portfolio, you can use leverage prudently to reach your target returns (Hawk and Serpent Allegory: Wealth Growth & Protection). The idea is that a portfolio with half the volatility of stocks can be leveraged 2:1 and still have comparable risk to stocks but much higher return. Cole’s backtest showed the Dragon at 15% volatility (somewhat less than stocks) already produced ~14% returns, beating stocks (Hawk and Serpent Allegory: Wealth Growth & Protection). His point is that investors fixated on maximizing return from each asset often ignore this approach: instead of chasing risky assets for a higher return, first create a low-risk, well-diversified portfolio, then scale it up. This is essentially what risk parity and all-weather funds do, but Cole’s version includes long volatility which risk parity typically doesn’t. So, he’s arguing for a different mindset: don’t take unrewarded risks (like concentration in equities) just because that’s what worked in the recent past. Spread your bets widely (across truly different risks) and if you need more return, add a bit of leverage to the whole mix. It’s safer than being un-levered in a concentrated portfolio, in his view, because of the much lower drawdowns. This is a nuanced point, but it’s key to the implementation intent of the Dragon Portfolio – it’s meant to be scaled to an investor’s desired return/risk, making it very flexible. For a conservative goal, one might run it unlevered (maybe expecting high single-digit returns with low volatility). For a more aggressive goal, one could lever it modestly to aim for 10%+ returns with still lower risk than an all-stock portfolio. Cole introduced this concept in his “Moneyball” paper by analogy to baseball: instead of only swinging for home runs (taking high volatility bets), string together lots of base hits (diversifiers) – you can increase your batting volume (leverage) to score more runs if needed, but you won’t strike out and lose the game in one go ().
Discipline and Contrarian Thinking: Across all his writings, a recurring theme from Cole is the importance of discipline and willingness to be contrarian. A Dragon Portfolio investor must “boldly own” assets like volatility and gold even when they are hated or seem to underperform for years (Hawk and Serpent Allegory: Wealth Growth & Protection). Cole often references psychological factors: investors abandon hedges when they seem costly, or they chase what’s been winning (recency bias). The structure of the Dragon is almost a contrarian bet in itself – it deliberately allocates to the out-of-favor corners of the market. Cole’s argument is that one must forego the temptation to be 100% in the serpent (greed) or 100% in fear; the balance is key. His allegory frames it almost as a moral or spiritual balance – the enlightened Hawk mind keeping the greedy Serpent impulses in check (Hawk and Serpent Allegory: Wealth Growth & Protection). In practical terms, he’s urging investors to have a plan (an allocation) and stick to it through thick and thin, much like rebalancing into assets that have recently done poorly and trimming those that have done well. The Dragon Portfolio requires that kind of contrarian discipline (e.g., adding to long vol after years of calm or adding to stocks after a crash, whichever is needed). Cole believes this approach transforms the very market cycles that harm most people into opportunities for the disciplined few (Episode #317: Chris Cole, Artemis Capital Management, “You Want To Diversify Based On How Assets Perform In Different Market Regimes” - Meb Faber Research - Stock Market and Investing Blog) (Episode #317: Chris Cole, Artemis Capital Management, “You Want To Diversify Based On How Assets Perform In Different Market Regimes” - Meb Faber Research - Stock Market and Investing Blog).
In summary, Christopher Cole’s key arguments revolve around the idea that to achieve great wealth preservation and growth over the very long term, one must break free from the conventional 60/40 paradigm and embrace true diversification across extreme scenarios. The Dragon Portfolio is the practical embodiment of those ideas. It is structured to address the failures of typical portfolios by hedging against the big dangers (inflation, deflation, volatility spikes) that are often ignored during good times. Cole’s whitepapers provide both a compelling narrative (the hawk and serpent fight) and hard data (90-year backtests) to back up this approach.
Ultimately, the Dragon Portfolio challenges investors to rethink risk and return: rather than asking “what will yield the highest return next year?”, ask “what asset mix will ensure my children’s children still have wealth 100 years from now?” (Hawk and Serpent Allegory: Wealth Growth & Protection). By combining assets that prosper in every conceivable environment, and by taking a long-term, regime-aware perspective, Cole’s Dragon Portfolio aims to be exactly that enduring solution. It underscores a powerful conclusion from his research: the secret to long-term prosperity isn’t forecasting the future, but preparing for a range of futures (Hawk and Serpent Allegory: Wealth Growth & Protection). The Dragon Portfolio, with its blend of stocks, bonds, gold, commodity trend, and long volatility, is a clear, if unconventional, roadmap to do so – allowing an investor of average intelligence (and strong discipline) to follow the concepts and potentially achieve more stable and resilient outcomes than traditional strategies (Hawk and Serpent Allegory: Wealth Growth & Protection) (Hawk and Serpent Allegory: Wealth Growth & Protection).