Photo Credit: jessica wilson {jek in the box}
David:
Dear JJJ,
Good to hear from you. It has been a long time.
Asset allocation is always a marriage between time horizon (when is the money needed for spending?) and expected returns, with some adjustment for risk. I suspect that you are like me, and play for a longer horizon.
I’m at my lowest equity allocation in 17 years. I am at 65% in equities. If the market goes up another 4-5%, I am planning on peeling of 25% of that to go into high quality bonds. Another 20% will go if the market rises 10% from here. At present, the S&P 500 offers returns of just 3.4%/year for the next ten years unadjusted for inflation. That’s at the 95th percentile, and reflects valuations of the dot-com bubble, should we rise that far.
The stocks that I do have are heading in three directions: safer, cyclical and foreign. I’m at my highest level for foreign stocks, and the companies all have strong balance sheets. A few are cyclicals, and may benefit if commodities rise.
The only thing that gives me pause regarding dropping my stock percentage is that a lot of “friends” are doing it. That said, a lot of broad market and growth investors are making “new era” arguments. That gives me more comfort about this. Even if the FAANG stocks continue to do well, it does not mean that stocks as a whole will do well. The overall productivity of risk assets is not rising. People are looking through the rearview mirror, not the windshield, at asset returns.
I can endorse some gold, even though it does nothing. Nothing would have been a good posture back in the dot-com bubble, or the financial crisis. Commodities are undervalued at present. I can also endorse long Treasuries, because I am not certain that inflation will run in this environment. When economies are heavily indebted they tend not to inflate, except as a last resort. (The wealthy want to protect their claims against the economy. The Fed generally helps the wealthy. Those on the FOMC are all wealthy.)