The Unchanging in a Changing Situation: How Ordinary People Can Manage Asset Allocation

Ask AI · How does Markowitz’s diversification theory reduce risk in real-world investing?

After my last post (the vanishing 1.8%, what happens to your money), I noticed some anxiety in the comments: “When you have no money, you worry about earning it; when you have a bit of money, you worry about returns; when you’re not making money, you worry your wallet is shrinking—so people like this are anxious nonstop through their whole lives.”

So I got a slot with the editor for this piece—to talk about how ordinary people can do asset allocation.

First, I need to make this clear: asset allocation is a highly professional matter, so this article is as practical as possible for the general public. This piece does not cover specific tickers.

This is a world of turbulence

In 2026—less than three months have passed—global markets have already been enough to make people’s heads hurt.

In January, silver futures suddenly crashed with no warning, wiping out a large batch of long investors overnight.

At the end of February, the U.S. and the U.S.-backed alliance teamed up to strike Iran; the war in the Middle East began. The Strait of Hormuz was locked down, and crude oil surged more than 40% within a week.

On March 9, after Trump said, “The war will be over soon,” WTI crude plunged from $120 to $81—more than a 40% intraday swing. The same day, the Korean stock market fell 8%, triggering circuit breakers.

March 20’s “Big A” was known as the “4000-point defense battle.”

And on March 23, Brent’s intraday swing was again close to 20%.

As the war intensified and “Trump’s TACO behavior” became even harder to predict, in these days the Big A has already been hovering around 3800 points.

Gold is at $4,300 per ounce. In fact, when I wrote this on Friday, gold was still around the $4,500 level. At the time, the author saw from the candlestick chart that technically: there was basically no bottom support right away; after the five-day line crossed downward over the sixty-day line, it was about to cross the 120-day moving average—but just three days later, it already crossed down over the 120-day.

But whether it can warm up again afterward remains to be observed.

The Fed’s rate-cutting timetable has been changing all the time. At the start of the year, the market was pricing in a June cut; then it moved to September. Now there are even signs of a rate hike in September 2027. Add in the new chairman, Waller, taking office in May—the policy direction is not fully clear yet.

AI too: last year it was still “a technological revolution that changes human destiny.” This year, the U.S. corporate layoffs have accelerated—Amazon, UPS, and Morgan Stanley are all cutting jobs. The market keeps swinging between “AI brings growth” and “AI brings unemployment,” and tech stocks (especially software stocks) keep getting dragged into repeated, back-and-forth turbulence.

And Trump’s tariffs need no further mention. Last year they once reached 400%. The U.S. then went through the “three-kill” across stocks, bonds, and FX. This year it’s stepping up again—throwing in a 301 investigation from time to time. Combined with the Middle East situation, market sentiment has been battered again and again until people feel exhausted.

If you try to make decisions following every single piece of news—chase gold today, cut crude oil tomorrow, add more to U.S. stocks the day after, and clear out everything on the next day—most likely you’ll end up getting hit on both ends, stopping losses repeatedly.

The principle of asset allocation—diversification!

In an environment like this, one question becomes especially important: what is there that doesn’t change with changes in Trump’s Twitter posts, missiles, and Wall Street narratives?

There is—one of the asset allocation principles: diversification.

Why can diversification hedge risk?

This goes back to the investment portfolio theory proposed by Harry Markowitz, the 1990 Nobel Prize in Economic Sciences laureate. And the core of this theory is hidden in a concept called the correlation coefficient.

Simply put, the correlation coefficient measures whether the “up-and-down timing” of two types of assets is consistent. Its value ranges from -1 to 1. Different values correspond to completely different risk-hedging effects.

Generally speaking, choosing different assets—even with a correlation of 0.3 to 0.4—still provides a function to hedge risk.

Diversification sounds like something everyone knows, but in real practice most ordinary people can’t do it.

The reason is simple: human instinct is to chase rallies and sell off dips—to bet on the direction you’re most familiar with, putting all your money into the one direction you feel the most confident about.

If you held all gold: this year in March, when gold stopped rising and silver suddenly crashed, you started to panic. If you held all deposits: seeing interest rates fall steadily, your purchasing power shrank bit by bit.

No single asset can win in every environment. But a reasonable diversified portfolio can avoid losing too much in most environments.

How do you make a diversified investment?

How? Diversification has four dimensions—let’s go through them one by one.

First dimension: diversification by asset type—both stocks and bonds are needed.

This is the most basic layer.

Stock-type assets offer the possibility of long-term growth, but they are volatile. Bond-type assets provide relatively stable cash flow, but the returns are limited. Between the two, there is a statistically significant feature: in most economic environments, when stocks fall, bonds often can hold up—and sometimes even rise. And the reverse is also true.

How to allocate proportions depends on your risk “preference,” in other words, how much short-term loss you can tolerate.

If you absolutely cannot accept losses, or if you need this money within the next two or three years: stocks 10%-20%, bonds 80%-90%.

If you have stable income and can weather about 10% short-term volatility: stocks 30%-40%, bonds 60%-70%.

If you have relatively rich investment experience and you’re far from needing the money: stocks can go up to 50%-70%, and the rest goes to bonds.

The key is: once you set the proportions, you must execute with discipline.

If the stock portion rises too much and exceeds the target allocation, sell some and move it into bonds. If it falls too much and drops below the target allocation, pull some from bonds to top up. This action is called “rebalancing.”

It seems counterintuitive—sell when it’s up and buy when it’s down. But in the long run, it’s one of the most effective disciplines for riding through bull and bear cycles.

There’s also a way of thinking about stock allocation here: the “5+3+2” rule. I’ll explain it well in the next article.

Second dimension: diversification by currency—allocate currencies based on your real needs.

Many people never think about this dimension, but it’s actually very practical.

At the start of 2025, the RMB depreciated to above 7.3 against the U.S. dollar. If the child was studying in the U.S. then, the tuition converted back into RMB would be several tens of thousands more per year. Conversely, at the start of 2026, if the RMB goes through a period of modest appreciation, then the value of held USD assets converted back into RMB will shrink.

FX rate volatility itself is a form of risk. Betting on a single currency is effectively betting on the direction of exchange rates. And exchange-rate trends are harder to predict than the stock market. So the approach is simple: follow your needs.

If you have plans for studying abroad, start exchanging currency in batches two or three years in advance and allocate some USD assets to avoid running into an unfavorable exchange rate when concentrating exchanges.

If you plan to buy property overseas or immigrate, diversify the target currencies according to your timeline.

If you live purely within China and have no needs for foreign-currency spending—focus on RMB assets, and keeping a small amount of USD or HKD assets for hedging is enough.

Your needs are known; FX trends are uncertain. We use what is certain to deal with what is uncertain.

Third dimension: diversification by country—don’t put all your assets into a single economic entity.

This dimension goes deeper than currency.

Here are two examples: even if they’re both USD assets, buying U.S. Treasury bonds versus buying Singapore REITs have completely different risk structures. Even if they’re both Eurozone assets, Germany’s economic situation and Italy’s fiscal pressure are still different things. No country’s economy will always be good forever, and no country will always be bad forever.

China is adjusting its structure and growth is slowing, but new energy and AI applications are still leading globally. The U.S. faces risks of stagflation, but its foundation for technological innovation remains. Southeast Asia is absorbing industrial relocation—growth is fast, but market depth is limited. Europe has severe aging, but high-end manufacturing and brands still have barriers.

To bet on “which country will be the best in the future”—if you get it right, of course it’s good. But the probability of consistently getting it right over time is very low. Diversifying across different economic entities lets the differences in each country’s cycles provide buffer to your portfolio—that’s the more稳妥 approach.

For most domestic investors, a practical framework is: A-shares plus Chinese bonds as the main body, accounting for 60%-70%. Use Stock Connect to allocate some Hong Kong stock exposures, 10%-15%. Then allocate some overseas assets via QDII funds or cross-border connectivity channels, 15%-20%.

You don’t need to make it complicated, but the awareness of “not going all-in on one country” should exist. Especially in an environment like 2026—where global politics and the economy are deeply intertwined—any single market could shake violently because of an external event that you can’t control at all.

Fourth dimension: diversification by time horizon—your money shouldn’t all mature at the same time.

This is the dimension easiest to ignore, but it’s especially critical during periods when rates are falling.

Many people buy wealth-management products like this: they see a one-year product with an okay yield, buy it all. After one year it matures, they find rates have already dropped, and the new product they can buy has lower yields. Then they buy another one-year product, it matures, then rates drop again. Every year they chase the tail end of rates.

There’s a very simple way to ease this problem: laddered allocation.

Assume you have 500k yuan for medium-to-long-term allocation:

100k yuan buys 1-year government bonds.

100k yuan buys 2-year government bonds.

100k yuan buys 3-year government bonds.

100k yuan buys 4-year government bonds.

100k yuan buys 5-year government bonds.

Average allocation—one slice for each of the five maturities.

After the first year ends, the 100k yuan in the 1-year tranche matures. Use it to buy a new 5-year product. That way, you have a chunk maturing every year to ensure liquidity; at the same time, you always hold part of longer-duration assets, locking in the interest rate available at that time.

If rates keep falling, you already have some money locked at a higher rate, so you don’t have to fully absorb the impact of rate cuts. If rates unexpectedly rise, the money that matures each year can be used to buy better new products, and you won’t miss out. No matter which direction rates move, your portfolio has a buffer.

After covering the four dimensions, there’s still one must-mention point: the individuality of each person is crucial too. With the same principles, the plans different people build should be different. Even with the same 1M yuan, a 30-year-old programmer and a 55-year-old retired teacher will have completely different allocation plans. A person earning 50k per month with no mortgage and a person earning 10k per month still paying a mortgage can tolerate wildly different levels of volatility in reality.

Before deciding how to allocate, ask yourself four questions first:

When will you need this money? This determines your choice of time horizon.

What’s the maximum short-term loss you can tolerate? This determines the stock-bond ratio.

Is there a rigid need for spending in foreign currency? This determines currency allocation.

How much do you understand about investing? This determines how complex the products should be.

If the answers differ, the plan differs. There is no single “best,” only what’s most suitable for you.

Closing and preview

Back to the beginning—2026’s world is indeed chaotic.

Trump’s tariffs, and the Twitter and the missiles in the sky over Iran, and the blocked straits; the Fed’s hesitation and leadership change; AI layoffs and revolution; oil prices swinging 40% in a day.

Every week there’s new plot, and every day could bring a reversal.

We can’t predict what the next piece of news will be, nor can we control where the next conflict will happen.

But what we can do is make our asset allocation not depend on any single narrative. Diversify by asset type, diversify by currency, diversify by country, and diversify by time horizon. Set the proportions, do the rebalancing well, then give yourself some patience.

In a world of change, what doesn’t change is to do diversified investing.

At the same time, China Merchants Bank’s 2025 annual report is about to be released, and there will be a performance briefing on March 30. As the “king of retail,” China Merchants Bank’s annual report has always been like a mirror reflecting changes in the wealth of Chinese residents.

In this annual report, there are a few numbers worth paying close attention to: changes in household deposit behavior, the rise and fall in wealth-management scales, and how the bank itself is responding to the downward trend in interest rates.

In my next post, I’ll break it down and see what signals for ordinary people’s wealth management are hidden in China Merchants Bank’s books.

★ Statement: The above only represents the author’s personal views, and is for reference, learning, and exchange purposes only.

Source: Mikuang Investment (ID: mikuangtouzi)