We recommend a baseline allocation in our asset allocations in terms of stocks versus bonds and cash, but we also recommend the following tactical allocations: leveraged loans within the bond allocation, dividend-focused stocks within the U.S. large-cap stock allocation, and an allocation of 55% value and 45% growth within U.S. large-cap equities.
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Thanks to dedicated financial infrastructure and full research coverage, local currency debt is now a plausible and enticing asset class. Fundamentals continue to improve even after being tested by the 2008-2009 financial crisis, while supporting technical factors such as increased liquidity and a broader investor base also have increased its attractiveness.
Forecasts for the demise of the bond market have popped up repeatedly during the past two years only to be deflated by yet another bond market rally. Arguably, it is different this time. Rising rates seem close at hand, and this paper provides detail on that view. At the same time, the paper cautions against overestimating the downside risk in bonds.
Municipal securities continue to provide yields in excess of Treasuries, despite their tax-favored status. For tax-exempt accounts, we continue to see opportunities in corporate debt, both investment grade and the highest quality non-investment grade, as well as in select international sovereign debt issues.
Multiple constraints limit the use of leverage, the nature of the assets that can be leveraged and the acceptable levels of total portfolio and asset-specific risks. These constraints can make leverage efficient for only a narrow set of portfolios. Leverage is also subject to concerns such as unanticipated capital calls and illiquidity spirals.
Successful investing is often seen as the ability to consistently and accurately make predictions about the economy, markets and specific securities. In reality, success comes less from predicting the future with blinding accuracy and more from selecting securities and vehicles that perform well when an investment thesis proves correct and perform OK when the thesis proves wrong.
Investors must be aware of the liquidity risk inherent in each asset class, establish a methodology to monitor and measure the liquidity risk premium of each asset class, and factor that into decisions about the appropriate mix of liquid and illiquid investments needed to serve their particular situation.
While diversification remains the cornerstone of modern portfolio theory, many diversifying investments followed the direction of the equity markets when they collapsed during the recent financial crisis. This led many investors to suspect that their asset allocation frameworks needed refining. An analysis suggests these investors may be right.
We recently have taken an increasing interest in housing and housing-related investment opportunities. While we cannot state with certainty when the recovery will come, we see a road towards redemption and investment opportunities while the market gradually improves.
This historical study suggests that monthly rebalancing appears to have minimal or no benefit in terms of end-of-year portfolio values except in years of high volatility. A look at rebalancing a 60/40 portfolio either monthly or annually from 1960 through 2009 showed an average annual difference between the two strategies of only 8 basis points.