{"id":90962,"date":"2016-06-07T07:08:13","date_gmt":"2016-06-07T11:08:13","guid":{"rendered":"http:\/\/countingpips.com\/?p=90962"},"modified":"2016-06-07T07:08:13","modified_gmt":"2016-06-07T11:08:13","slug":"investing-in-a-world-without-safe-returns","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2016\/06\/investing-in-a-world-without-safe-returns\/","title":{"rendered":"Investing in a World Without Safe Returns"},"content":{"rendered":"
June 7, 2016<\/div>
\r\n<\/div><\/div>

By WallStreetDaily.com<\/u><\/a> \"Investing<\/p>\n

A recent article in The Wall Street Journal<\/em> perfectly summarized the dilemma faced by today\u2019s investors.<\/p>\n

Being a successful investor, the article explained, means \u201cbigger gambles, lower returns.\u201d<\/p>\n

This reality can be credited to the world\u2019s central bankers and their relentless efforts to stimulate economic growth through zero and negative interest rates.<\/p>\n

The Good Old Days\u2026<\/h2>\n

The WSJ<\/em> pointed out that it used to be much easier to make an annual 7.5% on your money. That is, in fact, the rate many pension funds and similar entities have as a target.<\/p>\n

Back in 1995, that target was met very easily, just by buying and holding investment-grade bonds.<\/p>

\r\n
\r\n

Free Reports:<\/p><\/div>\r\n

\r\n

<\/a>\r\n\t Get Our Free Metatrader 4 Indicators<\/u><\/b><\/a> - Put Our Free MetaTrader 4 Custom Indicators on your charts when you join our Weekly Newsletter<\/p>

\r\n
\r\n
\r\n

<\/a>\r\n\t Get our Weekly Commitment of Traders Reports<\/u><\/b><\/a> - See where the biggest traders (Hedge Funds and Commercial Hedgers) are positioned in the futures markets on a weekly basis.<\/p>

\r\n<\/div>\r\n

\r\n
<\/div>\n

I made this exact point in my recent article on investing for a child\u2019s college fund<\/a>. In the 90s I was a broker, and I recall that simply investing funds in U.S. Treasury zero coupon bonds was a perfect and conservative way to grow a college fund into a substantial and promising sum.<\/p>\n

In 2002, high-quality corporate bonds, on average, returned 11%. That was a year where stocks tanked 22%.<\/p>\n

And again, as shown by the Journal<\/em>, even as recently as 2005, bonds could make up 52% of a portfolio targeted to make 7.5% a year.<\/p>\n

\u2026Have Faded Away<\/h2>\n

But those days are long gone.<\/p>\n

The Fed and other big banks have turned us all on to hedge funds in order to get a decent return on our money.<\/p>\n

Like the big institutional investors, it\u2019s time that we pile on some risk in order to get back to that 7.5% return.<\/p>\n

The chart below depicts the portfolio allocation needed by pension funds to earn the same return an ultra-safe U.S. Treasury security did two decades ago.<\/p>\n

\"Taking<\/p>\n

Of course, the allocation will be different for individual investors since we have minimal access to private equity funds.<\/p>\n

It\u2019s a good starting point, however, for a discussion on asset allocation in today\u2019s environment.<\/p>\n

Regardless, it\u2019s crucial to keep in mind that every individual is unique, with different risk tolerance.<\/p>\n

These suggestions must be adjusted to reflect an investor\u2019s lifestyle, investment portfolios, and overall preferences.<\/p>\n

Asset Allocation<\/h2>\n

The asset allocation that I recommend is vastly different than what robo-advisors are encouraging.<\/p>\n

Their algorithms have been skewed by years of central banks\u2019 liquidity pushing stocks higher. That era finally seems to be coming to an end, with U.S. stocks little changed since the end of 2014, and it\u2019s imperative that investors be ready for a change in landscape.<\/p>\n

A Bloomberg <\/em>survey found that many portfolios at firms like Betterment and Wealthfront are 80% to 90% stock-based, which isn\u2019t a good situation to be in if a bear market strikes.<\/p>\n

Based on my decades of experience in the investment industry as well as my foresight into the future of the market, here\u2019s a breakdown of my preferred asset allocation\u2026<\/p>\n

Bonds<\/strong> \u2013 20%.<\/p>\n

I firmly believe the \u201cmad\u201d central bankers will keep their crazy policies. From nothing, we now have $10 trillion worth of global sovereign debt with a negative yield!<\/p>\n

As institutional investors chase safety, the remaining bonds with a positive yield \u2013 U.S. Treasuries, foreign bonds in places like Australia and emerging markets, and high-quality corporate bonds \u2013 will be drawn toward negative yields as if being sucked into a black hole. I would continue to avoid junk bonds.<\/p>\n

Thus, bond prices will go up as yields drop, profiting the holders of such bonds.<\/p>\n

Real Estate\/REITs \u2013<\/strong> 20%.<\/p>\n

The same logic applies to REITs \u2013 in the search for yield, investors will bid up the prices on REITs. And there is, in fact, something tangible backing up the yield.<\/p>\n

However, it\u2019s important to be very picky. Buying a shopping center REIT, while retailers are falling victim to the success of Amazon and the like, would not be wise.<\/p>\n

Invest in REIT mainstays rather than risks.<\/p>\n

Stocks \u2013<\/strong> 50%.<\/p>\n

This money in turn has to be broken down further.<\/p>\n

I would put only half of the funds into U.S. stocks because of their current high valuations. The cyclically adjusted price-to-earnings ratio, known as the CAPE or Shiller P\/E ratio, is at the 10th<\/sup> highest level ever.<\/em><\/p>\n

Then I\u2019d reserve 85% of this allotment of funds in large-cap stocks, with the remainder in small caps.<\/p>\n

I\u2019d lean towards funds that invest in sectors with safety and yield, like consumer staples.<\/p>\n

The other half, I would spread around the world.<\/p>\n

European as well as many other emerging markets are cheap. Some of them are cheaper than they\u2019ve been in 10 or 20 years. I expect returns from these markets to outperform those of the U.S. market.<\/p>\n

But not just any foreign market will do. Once again, it\u2019s important to buy with precision in mind.<\/p>\n

In Europe, for instance, banks must be avoided. Negative rates are killing them. That means sidestepping index funds. Vanguard\u2019s FTSE Europe ETF <\/strong>(VGK<\/a>), for example, has over 21% of its portfolio in financial stocks.<\/p>\n

Don\u2019t be afraid to invest a percent or two in frontier markets, either. They\u2019re largely non-correlated with U.S. markets and have repeatedly outperformed their larger emerging market cousins in recent years.<\/em><\/p>\n

Commodities \u2013<\/strong> 10%.<\/p>\n

So far in 2016, commodities have been the top-performing asset class, and warrant about a tenth of investment fund allocation.<\/p>\n

The 11% gain on the Bloomberg Commodity Index outpaced both global bonds (6%) and global equities (2%).<\/p>\n

At the moment though, I would put most of that percentage into precious metals with a bit invested in still-cheap agriculture-related commodities.<\/p>\n

Following this allocation model generally, with the necessary tweaks to represent individual needs and interests, should bring investors to the \u201cpromised land\u201d \u2013 that now-elusive target of a 7.5% annual return.<\/p>\n

Good investing,<\/p>\n

Tim Maverick<\/p>\n

The post Investing in a World Without Safe Returns<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

 <\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

By WallStreetDaily.com A recent article in The Wall Street Journal perfectly summarized the dilemma faced by today\u2019s investors. Being a successful investor, the article explained, means \u201cbigger gambles, lower returns.\u201d This reality can be credited to the world\u2019s central bankers and their relentless efforts to stimulate economic growth through zero and negative interest rates. The […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-90962","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/90962","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=90962"}],"version-history":[{"count":3,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/90962\/revisions"}],"predecessor-version":[{"id":90974,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/90962\/revisions\/90974"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=90962"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=90962"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=90962"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}