QUESTION: I saw this article by JP Morgan’s highly rated analyst. It says people only need two asset classes: global equities and a domestic corporate bond portfolio. Can this be correct?
ANSWER: Yes, and depending on the overall size of your portfolio and your risk aversion to large drawdowns you might just be able get away with one asset class (global equities). Under both scenarios, you will need some allocated to cash for transaction and costs, so technically it will be two or three asset classes.
The JPM analyst quite succinctly explains the global equities and local bond pairing, but I will focus on a global equities only allocation.
Many years ago, I was given about 100 portfolios of HNW individuals to manage. The most aggressive was an all equities (no bonds, quasi bonds or REITS, and minimal cash) but what struck me was the age of the HNW investor. It was a +70-year old woman. After speaking to a few people it was obvious why the portfolio was constructed the way it was.
Firstly, she had been investing for a long time and had been through many drawdowns on her portfolio (Black Monday, GFC, etc). She understood the magnitude of a very large drawdown in percentage terms, but her account balance was large effort that those drawdowns weren’t going to affect her lifestyle (travel, buying gifts for grandchildren, etc).
Secondly, she wanted to leave the largest possible estate and legacy for her family, so was willing to have the most aggressive large cap equities portfolio she could.
So with a single asset class portfolio she achieved her short term plans and long term goals. The traditional advice model for her would have resulted in radically different portfolio and outcomes, with a large allocation to bonds and low risk assets. The message, using the Monty Python line, is that we are all individuals and portfolio construction should be bespoke to you!
Finally, complexity might help someone sell financial products and service, but for the investor simple and low fees can deliver a better outcome.
Contact TurnerStreet if you wish to buy our current asset allocation recommendation (we do cash and equity only allocations for our wholesale clients), and the list of the stocks TurnerStreet would buy for a typical wholesale client, or if you would like TurnerStreet to manage your equities and derivatives portfolio.