I was reading a story by Condoleeza Rice in the Washington Post titled Will America heed the wake-up call of the Ukraine? In the piece Ms. Rice counsels U.S. politicians to adopt a policy of “strategic patience.” This is also excellent advice for investors today.
What do events in the Ukraine and other trouble spots in the world mean to you and your clients portfolios? We have received a number of calls that go something like this – “with the threat of war, should I make any changes to my portfolio?” Or in other words, what they are asking is should they get out of the market, raise cash or hedge?
This is what I shared with an advisor client recently and I share it with you today.
It comes down to energy and unfortunately Europe is heavily dependent on Russia for oil and natural gas. The U.S. can fill that role in the future and likely will. Having some portfolio exposure to energy is prudent; however, it is important to have a far broader strategic asset allocation game plan – a forward-looking 5-7 year view.
Given a richly priced market and a 5 year aged cyclical bull market the 5 year return expectations for U.S. equities is -0.03%. Not a disaster but to expect the kinds of returns that springboarded off of the 2009 crisis low is unrealistic; especially at high valuations tied to current peak earnings.
Risks exist at all times so broader allocation and adhering to a solid game plan makes sense. There will be many news events that may shake us from that plan. My personal view is a total portfolio structure that is 30% Equities (smartly hedged from time to time), 30% Fixed Income (flexible bond funds and shorter durations as we are at the end of a 30 year decline in interest rates) and 40% Tactical Investment Strategies. These are price momentum based strategies that seek to move in line with current leadership trends.
Want to go deeper into tactical investment strategies? Download the White Paper Understanding Tactical Investment Strategies. We call the concept of converting the traditional 60/40 portfolio to 33/33/34 Enhanced Modern Portfolio Theory and we believe it represents what a balanced portfolio should look like in today’s market.
The enhanced modern portfolio is constructed with the intent of capturing upside potential while mitigating downside risk. The objective is to smooth the return stream over time, instead of being whipsawed by volatile markets. You might say it is an investment philosophy based on strategic patience. – Steve Blumenthal