The long-term chart of stock prices traces a graceful line from the lower left to the upper right—a powerful illustration of wealth compounding. But zoom in to the scale of a typical human lifetime, and that smooth climb reveals wild market swings and devastating drawdowns. Unfortunately, none of us can choose the era in which we invest—or whether luck places our timeline on the steepest, smoothest stretch of that curve.

The real secret to compounding wealth, however, has less to do with luck—or complex finance—and far more to do with the simple arithmetic of steadily growing capital. Volatility, drawdowns, and taxes all conspire against this growth. Building a resilient foundation against these forces requires a more thoughtful, institutional, and modern approach. At Magnolia, we build portfolios that are Better, Bigger, and Broader—designed to navigate real-world market cycles and enhance long-term compounding.

The Foundation: Better Portfolios Through Meaningful Diversification

A better portfolio is defined by its ability to deliver stronger returns for the level of risk taken—resulting in a more favorable risk-reward tradeoff. Traditional portfolios composed only of stocks and bonds can fall short of this standard, especially during periods of market stress when both asset classes may move in the same direction. True diversification requires incorporating assets or strategies that behave differently across a range of economic environments. Key diversifiers aim to improve portfolio outcomes by tapping into return streams that are less correlated with traditional holdings.

Among these, Managed Futures (or Trend Following) strategies stand out. They capitalize on price movements across a wide range of global markets, including many that traditional portfolios ignore. Their returns are largely independent of both stocks and bonds, and they tend to perform particularly well during extended market downturns. When uncorrelated strategies like these are combined with traditional assets, they meaningfully enhance diversification and the overall risk-return profile—making the portfolio better.

Most portfolios lack these strategies either because they fall outside conventional allocations or because many advisors lack the tools or expertise to implement them effectively.

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Scaling Smarter: Bigger Portfolios with Capital Efficiency

As we've explained above, meaningful diversification improves a portfolio by reducing overall risk—lowering both volatility and  drawdowns. However, part of what makes the portfolio better can also limit it: allocating to diversifying assets often means reducing exposure to traditional return drivers like stocks. While risk may decline substantially, returns can dip slightly—resulting in a more efficient portfolio, but one that may fall short of an investor’s original return goals.

The solution is to make the portfolio bigger—scaling exposures up to preserve the improved risk-return balance while targeting higher returns. This isn’t about taking on more risk indiscriminately—it’s about using tools –like capital efficient funds– that provide greater exposure per dollar invested, in a thoughtful, disciplined way.

Expanding Access: Broader Portfolios with Private Markets

While “better” and “bigger” portfolios can be built entirely within public markets, the larger the set of assets we can draw from, the more opportunity we have to enhance returns and improve diversification. Private markets—once the exclusive domain of pensions, endowments, and other institutions—are now increasingly accessible to individual investors and represent a compelling opportunity for many portfolios. Broadening a portfolio means including private market investments—assets not traded on public exchanges—such as private equity, private credit, private real estate, and infrastructure. These investments can offer the potential for higher returns in the form of an illiquidity premium, but that’s only part of the story. They also access different parts of the economy, provide unique drivers of return, and offer additional sources of diversification that can help reduce overall portfolio risk. While not appropriate for every dollar in a portfolio, they can play a powerful role for many investors—enhancing long-term growth, improving resilience, and building a more well-rounded foundation for compounding.

Preserving Growth: Tax-Aware Strategies for Long-Term Compounding

Markets may fuel growth, but taxes quietly erode it. That’s why tax strategy should be embedded in the portfolio from the start—rather than treated as an afterthought. This includes not only placing the right assets in the right account types based on their tax characteristics, but also taking advantage of new opportunities to harvest losses, optimize capital gains treatment, and use innovative structures that can defer or potentially eliminate taxes. Some of these strategies represent the frontier of tax-aware investing. When integrated thoughtfully, they can significantly improve the returns investors keep—preserving wealth and accelerating long-term compounding.

A Holistic Framework

Compounding wealth over time isn’t about chasing returns, predicting the future, or relying on luck—it’s about building a portfolio that’s prepared for whatever comes next. At Magnolia, we believe the strongest portfolios are Better, Bigger, and Broader: thoughtfully diversified, efficiently scaled, and expansive enough to capture a wider range of opportunities.

• Better portfolios improve the risk-return balance through true diversification.
• Bigger portfolios use capital efficiency to scale those improvements and target higher returns.
• Broader portfolios expand the investment universe beyond public markets, unlocking new return drivers and deepening resilience.

This holistic framework is designed to help investors withstand market turbulence, stay invested through cycles, mitigate taxes, and grow wealth with greater confidence. Whether you’re revisiting your investment strategy or laying the groundwork for the first time, this framework offers a clear foundation for how we think about building portfolios—and what you can expect as we move forward together.

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Sources:
Stocks : VTSMX (Vanguard Total Stock Market Index Fund),
Trend following: SG Trend Index (SocGen Trend Index).
Portfolios are rebalanced annually. Returns, volatility and drawdowns based on end of month values.  

Equity drawdown periods:

Tech Bubble: Oct 2000 - Sept 2002
GFC (Great Financial Crisis): Sept 2007 - Feb 2009
2022 Rate Hikes: Jan 2022 - Sept 2022

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