The Core Concept of Return Stacking: Solving a Diversification Problem

Investment products predominantly address return or income challenges, while the core idea of return stacking focuses on alleviating diversification issues. In the investment arena, universal agreement on diversification exists, with an emphasis that more diversification generally leads to better outcomes when all else is equal. However, typical portfolios heavily skew towards a 60/40 stock-bond allocation, often neglecting alternatives like commodities or international investments. This limited diversification may stem from recency bias, where recent stock and bond performance overshadows broader opportunities. The process of achieving diversification frequently involves a trade-off, requiring investors to sell existing assets to incorporate new ones, thus creating a high hurdle for diversification. The challenge lies in integrating alternatives without relinquishing established, lower-cost, and more transparent assets.