If I had a crystal ball...... Creating a Balanced Investment

January 24, 2013

If I had a crystal ball and could look at both the stock and bond markets to determine a reasonable allocation for balancing growth and income with a margin for safety going forward I’d *****

Over the previous 30+ years bonds have often been paired with equities to provide a reasonable balance to an asset allocation model.

Understanding that bonds react inversely to interest rates (meaning they go down in value when interest rates rise) the U.S. bond market isn’t exactly in the sweet spot of the cycle. Currently with long term bond yields at historic lows and coupled with the amount of “Quantitative Easing” that’s taken place not just in the U.S. but worldwide providing mountains of excess liquidity in the financial  system the bond market seems ripe for reversing its 30 year trend.

  To me, to be attractive, bonds especially US bonds are most valuable when interest rates are falling or at least aren’t rising.

Several of the top rated (by Morningstar) Bond managers; Bill Gross of PIMCO, Jeff Gundlach of DoubleLine, Dan Fuss, Bob Rodriguez not to exclude Warren Buffet have indicated that bonds don’t represent the value anymore that they previously held and equities actually represent a better value going forward….. This doesn’t imply that equities are cheap or even inexpensive, just that they represent a better value than bonds. Could this be why these bond managers and their respective firms (managing over a trillion dollars) are moving significant portions of their assets into equities and alternative investments?

 Since December 2007 thru July of 2012, investors have poured in excess of a $1 trillion into bond mutual funds and exchange-traded funds (ETFs) — that’s more than 33 times the amount that’s been allocated to equity funds and ETFs. Many institutions have also reduced long equity allocations. (This is according to Fidelity Investments and is also reported in the Investment Company Institute)

***** Under the current financial climate that exists worldwide it might be prudent to rethink a reasonable   asset allocation strategy that includes along with equities and bonds another category, known as "alternative investments".  Alternative Investments can include (Managed Futures, Long/Short strategies, Merger Arbitrage, Business Development Companies, REIT s, Precious Metals, Bonds in other currencies   and cash in other currencies) Many of  these alternative investments are currently accessible through mutual funds, uit's, limited partnerships and certain annuities..... 

The importance of this would be to help balance the inherent risk of a diverse portfolio with low correlated assets while trying to preserve purchasing power in the future when interest rates inevitability rise. This is important because retirement is a long road and the cost of almost everything we buy goes up over time.  Please note that some of these alternative investments are available to accredited investors only.


This information is intended for general information purposes only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult with your tax, legal and/or financial services professional regarding your individual situation. Investment value will fluctuate with market conditions. Past performance is no guarantee of future performance. Asset allocation and/or Diversification does not ensure a profit or protect against a loss in a declining market.