Thoughts on Asset Allocation During Challenges of Current Economic Environment
By Peter Miralles, President Atlanta Wealth Consultants (http://www.awc2.com)
770-394-4448/pmiralles@awc2.com
Given the economic environment, investors are looking at their portfolios and reevaluating each and every sector. Experienced investors should not try to become experienced traders to recoup their losses. Instead, they should look at their asset allocation for opportunities.
The traditional asset allocations of stocks and bonds have not lived up to their historical returns for the last 10 years. In fact, this was also true 10 years ago in 1999. Even if we go back 20 years, the returns were not “normal”. Let’s review. The 1980’s and 1990’s saw above average returns in the S&P 500. Bonds also saw above average returns. Investors expected this decade to be closer to average. Just like the previous decades surprises, the market returns were not average. They were far below average.
Asset allocations for the coming decade should include stocks, bonds, commodities and real estate. Home ownership and collectibles are for enjoyment and should not be considered investments.
Generally, bonds are interest bearing securities backed by the issuer. Bonds provide income and are used as a tool for slow wealth accumulation in many portfolios, but with higher predictability than stocks. Even the most aggressive investors should be aware of and consider investing in bonds.
The arguments for buy and hold philosophy for stocks are always the same and are still valid today. The fact is over the long run starting valuations for stocks are important to overall return. Today stocks average nearly 4% in dividend yields. If growth in economies and inflation resume at a slow to moderate pace, the investment picture looks extremely bright.
Commodities and real estate investment trusts may also be attractive to diversify asset classes and may perform well during normal times.
Gold is not an income producer and has been a real alternative for safety when currencies of governments become questionable. Government actions and interventions sometimes have unintended consequences that can be detrimental to other investment classes. Gold becomes attractive during those periods.
Not all investments are suitable for all investors. Going back to the Talmud over 2500 years ago, diversification of asset classes were as important as they are today.
In conclusion, market periods of high returns are frequently followed by periods of low returns and vice versa. The same pertains to volatility. High volatility periods are followed by low volatility periods. It is a natural part of capital market system. Investors should always be prepared for it.