A liquid portfolio is a set of positions that can be sold within days at a known price. That quality lets the mix change when the facts change, and lets the portfolio meet a capital call or a family need without a forced sale at the wrong moment.
We build liquid portfolios from four sleeves: equities, rates, digital assets and commodities. Each has a job. The difficulty is that the jobs interact, and the interactions change with the macro regime. This piece sets out how we think about each sleeve, how they depend on one another, and what would make us change the mix.
Four sleeves, four jobs
Equities are the growth sleeve. They are claims on corporate earnings, and over long horizons earnings grow with the economies that produce them. The cost is drawdown. Equity prices can fall sharply and stay down for years.
Rates, meaning cash, government bonds and high-grade credit, provide income and ballast. They pay a known coupon, and in the low-inflation decades before the pandemic they often rose in price as equities fell.
Digital assets are a diversifier with a very different return profile. Adoption, liquidity and sentiment drive them more than cash flows do, and they are much more volatile than the other sleeves.
Commodities, principally gold, are the hedge. Gold pays nothing, which is exactly why it behaves differently from assets priced off cash flows.
No sleeve should be judged alone. A bond that loses money in a year when equities rally may still have done its job.
What would change this framing is a sleeve changing its job. That has happened before.
Rates set the price of everything else
Every asset priced off future cash flows is priced off an interest rate. When the rate used to discount those cash flows rises, their present value falls. Equities whose earnings sit far in the future are the most sensitive. Bonds fall directly. Gold, which yields nothing, becomes more expensive to hold when cash pays a real return.
The speed of this can be striking. The US Federal Reserve raised its target range to 0.25 to 0.50 per cent on 17 March 2022 and had lifted it to 4.25 to 4.50 per cent by 15 December 2022, according to its record of open market operations.
For a Gulf-based investor the link is closer still. The Central Bank of the UAE anchors its Base Rate to the Federal Reserve's interest on reserve balances. Dirham overnight rates therefore track US policy closely, whatever the local economy is doing.
We therefore treat the rates sleeve as the reference point for the whole portfolio. When cash pays a meaningful real yield, every other sleeve has to clear a higher hurdle. When real yields are low or negative, the hurdle falls.
What would change the view is a durable shift in how the Federal Reserve sets policy, or a change to the dirham's anchor. Neither is our base case.
The equity and bond relationship is a regime
For much of the period before the pandemic, bonds tended to rise when equities fell. That negative correlation is what made a simple mix of the two so effective.
The BIS Annual Economic Report 2022 sets out the mechanism. In a low-inflation world, bad economic news was generally met with monetary easing, which lifted bond prices while equities fell. When inflation is high, downturns are more likely to be triggered by tighter policy, and that can push bond and equity prices down together.
That is the regime investors entered. BIS research published in December 2023 found that the correlation between US equity and government bond returns switched sign in mid-2021 and stayed positive through to the time of publication. The same research notes that the last prolonged period of positive correlation was in the 1980s and early 1990s, and that investors require a higher term premium when bonds stop hedging equities.
The implication is that we do not assume bonds will protect an equity portfolio. We first ask which inflation regime we are in. When inflation is low and anchored, duration earns its place as a hedge. When inflation is high or unstable, the rates sleeve is closer to a source of income and liquidity than to insurance. Protection then has to come from elsewhere: shorter duration, gold, or a smaller equity weight.
What would change the view is sustained evidence that inflation has returned to target and that policy is again responding mainly to growth. In that setting the negative correlation tends to reassert itself, and longer bonds regain their hedging role.
Digital assets and the question of size
Digital assets were once widely treated as uncorrelated with everything else. That view did not survive the pandemic. IMF research found that the correlation of daily Bitcoin and S&P 500 returns was 0.01 over 2017 to 2019 and 0.36 over 2020 to 2021. The same work found that spillovers between crypto and equity markets tend to rise in episodes of market stress.
The mechanism is liquidity. Easy financial conditions lift both; tighter conditions sink both. The diversification benefit is weakest exactly when it would be most valuable.
We therefore size digital assets by volatility first and conviction second. A position that moves far more than the equity sleeve consumes a disproportionate share of the portfolio's risk for each unit of capital. A small allocation can still dominate the portfolio's month-to-month swings. We would rather hold a position small enough to sit through a deep drawdown than a larger one that forces a sale near the low.
What would change the view is a sustained fall in volatility, deeper market structure, or a tightening cycle in which correlation with equities stays low. Any of these would support a larger weight.
Gold and the cost of holding nothing
Gold's main cost is opportunity cost. It pays no coupon, so its appeal depends on what the alternative pays after inflation. An article in the IMF's Finance and Development magazine makes the point: when real interest rates turn negative, gold becomes relatively more attractive, and in periods of stable inflation and robust growth it often languishes.
The same article records a second driver. Buyers kept coming even as central banks raised interest rates in 2023 and 2024, with official-sector purchases leading. When central banks set the marginal price, the link between gold and real yields can loosen for long stretches.
We hold gold as insurance against policy error, inflation surprises and geopolitical stress, and we accept that it can lag for years. It is a strategic holding. We do not use it to express a view on the next move in real yields.
What would change the view is a sustained slowdown in official buying, which would likely make real yields the dominant driver again. Other commodities, such as energy and industrial metals, sit outside the strategic mix. We hold them tactically, against specific supply and demand views.
Currency for a dirham-based investor
A dirham-based investor starts from an unusual position. The Central Bank of the UAE keeps the dirham pegged to the US dollar by intervening automatically in the foreign exchange market, buying dollars at 3.672 dirhams and selling at 3.673, according to its domestic market operations page. While the peg holds, US dollar assets carry almost no currency risk against the investor's base.
That reach extends further than it first seems. Hong Kong has operated its Linked Exchange Rate System since 17 October 1983, keeping the Hong Kong dollar within a band of 7.75 to 7.85 Hong Kong dollars per US dollar. Hong Kong equities therefore carry little currency risk for a dirham-based holder while the link holds. Korean equities are different. The Bank of Korea records that the won moved to a free-floating system in December 1997, so a holder carries the won's moves against the dollar on top of the share price.
In practice we treat the dollar bloc, including the dirham and the Hong Kong dollar, as home currency. Exposure to floating currencies such as the won is a deliberate position. We size it, and where it is unwanted, we hedge it.
What would change the view is any change to the dirham's anchor or the Hong Kong link. We regard both as remote, and we still record them as the assumptions on which the framework rests.
Rebalancing as a standing rule
Markets move weights. A strong run for equities leaves a portfolio carrying more equity risk than intended.
Rebalancing restores the intended risk. It also removes a decision that is hard to make well in the moment: trimming what has done well and adding to what has lagged.
We set tolerance bands around target weights and rebalance when a sleeve drifts outside them, and at scheduled reviews. Bands avoid churning on small moves. The calculation includes costs and tax, and sometimes the better answer is to direct new cash to the underweight sleeve.
We make no claim that rebalancing adds return. Its purpose is to keep the portfolio's risk where the client agreed it should be.
What would change the view is a change in the client's objectives, horizon or liquidity needs. Rebalancing restores a target. It does not decide whether the target is still right.
What would make us change the mix
The strategic mix rests on a few assumptions, which we review explicitly.
- The inflation regime. If inflation settles and policy again responds mainly to growth, longer bonds regain their hedging role and the rates sleeve can carry more duration.
- The level of real yields. Higher real yields raise the hurdle for every other sleeve and argue for more in rates. Lower real yields argue the other way.
- Correlation between digital assets and equities. If it falls and stays low through a tightening cycle, the case for a larger weight strengthens.
- Official demand for gold. If central bank buying fades, gold's sensitivity to real yields is likely to return.
- Currency anchors. Any change to the dirham or Hong Kong dollar arrangements would force a rethink of what counts as home currency.
- The client. A new liquidity need, a change of residence or a change of horizon outranks any market view.
The discipline lies in naming these conditions in advance. A change in the mix should answer to evidence that was specified before it arrived.
This article is general commentary on how portfolios are built. It is not personal advice and does not take account of your circumstances.