Dragon Portfolio — The Ultimate Guide to Creating Your Own

[Note: The Dragon Portfolio was created by Artemis Capital and Christopher Cole. The original research can be found here and here.]

Creating an investment portfolio is no easy task. Investors must consider what opportunities best deserve their capital and pick an amount to dedicate to each investment and asset class. 

Naturally, these choices become even more challenging to make during periods of market volatility. Interest-rate fluctuations, inflation, and the potential for recession all weigh on individuals attempting to make the best decisions. And that’s before you start worrying about uncertainty and even war in foreign markets and around the globe. 

So, it’s no wonder that one highly regarded solution, the Dragon Portfolio, has generated tremendous interest in recent years. For starters, the investment strategy behind this portfolio performs well in backtesting. What’s more, it also performs well in live market environments. 

If you’re considering building your own Dragon Portfolio, you’ve come to the right place. 

First, we’ll cover the definition so you can develop a basic grasp of what the Dragon Portfolio is, how it came to be, and the aims of a Dragon Portfolio strategy. Then, we’ll explain the types of investments a Dragon Portfolio calls for and the specific allocation for each.

Finally, you’ll be ready to pick a platform or brokerage account through which to build and operate your Dragon Portfolio. 

Let’s dive into the particulars.

What is the Dragon Portfolio? 

Chris Cole, chief information officer at the hedge fund operator Artemis Capital, released a research paper in 2020 entitled "The Allegory of the Hawk and the Serpent." In it, Cole established the fundamentals of the Dragon Portfolio alongside the firm’s research methodology, which included extensive backtesting to determine the type of asset allocation that would perform best through the changing macro conditions of the last 100 years. 

What makes the Dragon Portfolio unique is Cole and Artemis's fixed allocation approach. In other words, the assets chosen at the beginning of the paper were set in stone for the entirety of the 100-year test.

The results were startling, with returns associated with this asset allocation comparing favorably to alternative approaches such as risk parity, the 60/40 portfolio, and equities market investment during declines.

The Dragon Portfolio has shown remarkable resilience since its conceptualization in 2020. The strategy fully encompasses methods for building and maintaining—regardless of market conditions—thanks to its unique blend of asset classes and Cole and Artemis’s extensive backtesting. It has proven to be applicable to real-world market conditions, making the Dragon Portfolio an excellent choice for traders looking to fine-tune their investments.

How does the Dragon Portfolio work? 

The allegory referenced in the research paper's title is pivotal to understanding the strategy’s rationale.

Cole’s paper describes the “serpent" as a period of secular economic growth. Such a period occurs because of favorable factors and demographics, such as globalization, trade, technological advances, and prosperity—all of which contribute to market momentum.

But the serpent also undergoes periods of "eating its own tail"—self-destruction resulting from greed, fiat devaluation, and debt expansion—that drive asset price gains instead of sustainable fundamentals.

In contrast, the "hawk," which preys on the serpent, is the force of economic change that always leads to the downfall of the serpent whenever it enters a corrupted growth cycle. One of the hawk's wings represents debt defaults, crashes, recessions, wavering growth, low inflation, and an aging population. The other wing represents quantitative easing, fiat default, and inflation. 

As different as they are, these varying market conditions exist in tandem. Cole’s answer is the Dragon Portfolio, which is designed to be profitable in both serpent and hawk phases.

How can you structure your Dragon Portfolio?

Fortunately, creating a Dragon Portfolio is relatively straightforward. There are five main types of assets in such a portfolio, and every kind of holding comes with a specific suggestion for allocation. 

1. Equity-linked

Equity assets, at 24% of the Dragon Portfolio, are the most significant component of this trading strategy.

Why? It’s simple. Stocks offer the most reliable returns during “serpent periods” of economic growth, positioning investors to make considerable returns in bull markets.

At the same time, 24% is a relatively small allocation. The portfolio’s low allocation to stocks helps investors limit losses during bear markets. ETFs and index funds are both convenient vehicles for achieving the recommended 24% allocation to stocks.

1. Fixed income

Securities, treasury bonds, and other low-risk, fixed-income investment assets comprise 18% of the Dragon Portfolio.

Although bond returns tend to be lower than stock returns, the money you invest in bonds is quite safe. Additionally, these types of assets require little to no oversight or management and can be easily accessed through ETFs such as the TLT.

1. Gold

Gold, at 19% of the Dragon Portfolio, makes for a strong hedge against inflation and other types of currency debasement.

It’s well known that investors “flee” to gold during periods of uncertainty and recession, which means gold can help you ride out periods of hawk economic activity. Investing in gold is also relatively easy since investors can use ETFs to gain exposure rather than owning gold bars outright. This allows for greater liquidity and also means you don’t have to store anything. 

1. Commodities

Commodities (i.e., raw materials) comprise 18% of the Dragon Portfolio.

Commodities tend to perform well in inflationary conditions, whereas buying opportunities often emerge in periods of deflation. Careful investing during both periods—whether involving long or short plays—can lead to profit.

In the case of the Dragon Portfolio, the 50-day moving average strategy is the recommended technical analysis method for identifying trends in the commodity market.

1. Long volatility

At 21% of the Dragon Portfolio, long volatility focuses on profitability in the face of large market swings.

This options strategy (sometimes called a derivatives strategy) is tantamount to having an insurance policy. When the market suffers upheavals in either direction, the long volatility portion of your portfolio compensates.

Just keep in mind that the goal of long volatility isn't profit but wealth preservation.

Building your own Dragon Portfolio

Now that we've covered both the theory and the construction behind the Dragon Portfolio, it's time to discuss practical matters: how to set up a Dragon Portfolio of your own. In this case, the primary choice you must make is which trading platform or platforms you wish to use. 

When choosing a platform, the most crucial part of the decision-making process is access. Be sure that it provides access to all five asset classes.

You’ll also want to choose a platform with a wide range of best-in-class tools for retail investors, including data visualization, historical data access for backtesting, and professional-grade data for trading. Some platforms also have their own forums or communities for you to chat with like-minded investors. This helps you refine your trading strategies.

Take fees into account when choosing a platform, as well. The ancillary costs add up over time. Investigate whether a platform charges a fixed fee or one based on your assets under management.

Finally, it's essential to know how other investors have rated a platform's customer service in case things go wrong or trades don't execute as planned. Look for a platform that provides a high level of service. 

Set up and start trading your Dragon Portfolio with Composer

Composer is a trading bot platform with no coding required where you can find and invest in the Dragon Portfolio directly. Scroll down the factsheet, and you’ll find a detailed description of the assets the strategy has held to date and the portfolio’s construction.

One advantage of using Composer is the ability to quickly edit your strategy in the visual editor and deploy it within minutes. This makes it easy to see the Dragon Portfolio’s logic and adjust it based on new market insights you find.

Composer also has an AI assistant powered by ChatGPT-4. Simply tell it your desired approach, and it will build the strategy for you.

Sign up for Composer today and start trading smarter.