Asset Allocation – TurnerStreet

May 30, 2024May 30, 2024 PPD1962 Asset Allocation|Cash|Debt|Derivatives|Equities

AA: is it ok to have only two asset classes in your portfolio?

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.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

March 2, 2024April 8, 2024 PPD1962 Asset Allocation|Equities

AA: should you put all your savings into stock?

QUESTION: I saw this article in The Economist? Should I put all my money into stocks (equities)?

ANSWER: It really depends on how rich you are.

If you are poor, you need money for the basics: food; shelter; and, clothing. If you have cash, you aren’t going to risk it on buying risk-assets; crypto currencies; or, even, lottery tickets (although some hard-core pragmatists would argue that makes sense).

As you get richer, you want to spend more on yourself now and in the future, so you need to think about investing (returns and risks) and how that will correlate with your spending for needs and wants. At this stage having some equities makes sense.

Get even richer, and you need to add legacies (for family, friends and philanthropic interests). Hence, you are interested in longer term returns and can wear the fluctuations in the markets for risk-assets.

Let me give you an example of an 80 year old woman; she owns a beautiful house ($15m); her investment portfolio is $11m; has about dozen grandchildren, etc; and, has some philanthropic interests. This investor put all her money into equities and every year, despite market fluctuations, has spent more on Christmas presents for her family, spent more on other discretionary expenditures, each year. With measured drawings, and long term returns of equities, she has optimised her utility. The size of her portfolio compared to drawings means bear markets have been irrelevant to her.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

December 27, 2023 PPD1962 Asset Allocation|Cash|Debt|Equities|Realty

Debt: why equities folks follow it.

QUESTION: TSA do asset allocation only between cash and equities portfolios, so why are you interested in government debt?

ANSWER: Like it, or not, most investments are based off US Treasuries, so we need to abreast of what is happening. Recently, there was a good article that we would direct you to for an update: see this link. The US Treasuries are often used for the risk-free rate, which helps us determine the value of equities and their alternatives.

However, given the political instability in the US, maybe it will not be the risk-free rate in the future that investment managers use. Ironically, there is a significant proportion of the 74m of Americans who voted for Trump in 2020 who would prefer Trump over democracy. That is a huge number and the risk is that those Trump supporters have filtered into all elements of society: the Supreme Court; lower court; Congress; local election officials; et al. If that sounds familiar, think of Hungary, Turkey and Poland.

Finally, although TSA limits itself to cash and equities, we also like realty, specifically freehold land where the investor has local knowledge. However, most TSA clients already do land investing themselves, so we cannot add value, except to recommend freehold over leasehold or strata property (we will expand on that later).

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

November 6, 2023 PPD1962 Asset Allocation|Cash|Debt|Equities|Uncategorized

Debt: bond v. term deposits

QUESTION: Vanguard wrote an article on why bonds are better than term deposits for investors, do you think they are correct?

ANSWER: yes, but...

Simplistically, and generically, the answer is obviously yes. However, investors do not come all in the same size (of portfolio assets). Investors who have a large enough investment portfolio, which means they are non-retail investors might be able to take a much more efficient, riskier and more profitable route of having only two asset classes in their portfolio: cash and equities. This might seem strange to exclude bonds, but in a higher inflation environment bonds and equities are positively correlated. Also, moving from cash to equities (and back) is far cheaper than the transaction costs of a bond portfolio. Additionally, in many jurisdictions bank deposits are government guaranteed.

In the words of the prophet, Brian, “you are all individuals” so think carefully before acting on publications aimed at a mass audience.

ACTION PLAN:

Put together a list of your assets and income, and determine what return you are looking for and how much you are willing to lose in the first year of your new portfolio strategy.
If you don’t have a view on the expected returns/risks of the different asset classes, you are just punting securities, derivatives, etc, rather than investing. You should get a licensed investment manager.
The most significant means to increasing your wealth is getting the asset allocation correct. For most people, that means knowing when to put money into equities, bonds, et al and when to take it out. The first thing you need to ask your investment manager (or yourself if you take the DIY route) is what is the expected 10-year US Treasury yield and the percentage of a portfolio that should be equities, bonds, realty or cash (the other asset classes are so speculative, they should be only for the very brave).
Once you establish how much to allocate to each class, then it is a question of which security or property in each class to buy. For the DIY folks, that will most likely be an index. For professional investment managers, it will be buying individual stocks, bonds, realty or leaving money in cash.
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.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

AA: debt markets can drive equities and other markets

QUESTION: the New York Times is concerned enough by the bond market to write an article on the matter, so are you concerned too?

ANSWER: yes.

Again, Finance 101 says that an asset is worth its cashflows in perpetuity, discounted by an appropriate rate. The appropriate rate is almost always related to the 10-year US Treasuries, who when their yields go up, valuations go down! Why, and how far, yields rise or fall is subject to lots of analysis by pseudo-scientists (also known as economists and chartists). It is fair to say that with lots of government debt to refinance, political pressure, a great economic resurgence, low unemployment, on the balance of probabilities, US yields are likely to rise. How much is debatable, but for anyone older than 60, another 1% would be at the lower end of expectations.

ACTION PLAN:

Firstly, if you can’t value an asset, including equities, by discounted cash flow, you are just punting securities, derivatives, etc, rather than investing. You should get a licensed investment manager.
The most significant means to increasing your wealth is getting the asset allocation correct. For most people, that means knowing when to put money into equities, bonds, et al and when to take it out. The first thing you need to ask your investment manager (or yourself if you take the DIY route) is what is the expected 10-year US Treasury yield and the percentage of a portfolio that should be equities, bonds, realty or cash (the other asset classes are so speculative, they should be only for the very brave).
Once you establish how much to allocate to each class, then it is a question of which security or property in each class to buy. For the DIY folks, that will most likely be an index. For professional investment managers, it will buying individual stocks, bonds and realty.
Contact TurnerStreet if you wish to buy our current asset allocation recommendation, 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.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

Equities: fear in markets?

QUESTION: why fear is spreading in financial markets?

ANSWER: The Economist, and TurnerStreet, agree it is because of the long-haul reality of high interest rates.

At a recent investment conference TurnerStreet attended, all the speakers, except one, thought it may be late 2024 or 2025 before interest rates start to fall again. However, thinking about want truly is normal for interest rates, shouldn’t interest rates continue to increase by 2-3%? If correct, then the tide is going out for all the financial markets for some time. The best game in equities would then be to seek “alpha” and to hedge the “beta”.

ACTION PLAN:

Firstly, if you have never heard of alpha and beta before reading this article or understand what it signifies, you are just punting securities, derivatives, etc, rather than investing. You should get a licensed investment manager.
The most significant means to increasing your wealth is getting the asset allocation correct. For most people, that means knowing when to put money into equities, bonds, et al and when to take it out. The first thing you need to ask your investment manager (or yourself if you take the DIY route) is what percentage of my portfolio should be equities, bonds, realty or cash (the other asset classes are so speculative, they should be only for the very brave).
Once you establish how much to allocate to each class, then it is a question of which security or property in each class to buy. For the DIY folks, that will most likely be an index. For professional investment managers, it will buying individual stocks, bonds and realty.
Contact TurnerStreet if you wish to buy our current asset allocation recommendation, 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.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

September 13, 2023October 15, 2023 PPD1962 Asset Allocation|Equities

Equities: are US stocks too expensive?

QUESTION: are US stocks too expensive?

ANSWER: Yes, is the conclusion of The Economist, and TurnerStreet.

Equity Risk Premium (“ERP) is a great indicator of whether a market is expensive. Even with the 0.2% fall in the S&P500 since the article was written a month ago, it isn’t enough to temp TurnerStreet back into equities. Additionally, annecdotally, we aren’t hearing great things about future earnings.

ACTION PLAN:

Firstly, if you have never heard of ERP before reading this article or understand what it signifies, you are just punting securities, derivatives, etc, rather than investing. You should get a licensed investment manager.
The most significant means to increasing your wealth is getting the asset allocation correct. For most people, that means knowing when to put money into equities and when to take it out. The first thing you need to ask your investment manager (or yourself if you take the DIY route) is what percentage of my portfolio should be equities.
Once you establish how much to allocate to equities, then it is a question of which equities. For the DIY folks, that will most likely be an index. For professional investment managers, it will buying individual stocks.
Contact TurnerStreet if you wish to buy our current asset allocation recommendation, 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.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

August 7, 2023 PPD1962 Asset Allocation|Debt|Equities

AA: US gets downgraded

QUESTION: is the credit rating downgrade a big deal?

ANSWER: Yes.

The US debt markets have been the global benchmark for decades, but now with political disfunction it isn’t certain that global, or even US markets, are

ACTION PLAN: Fitch Ratings’ credit downgrade of the US was well considered and appropriate with the further breakdown of political system in the US. The decline started in 1994 when Newt Gingrich started the “Contract with America” which was rubbish economics but aimed at the “deporables”. FoxNews, which was entertainment masquerading as news at the time (and still is) took up the idea to boost it viewer ratings. By 2020, 74m Americans voted for DonaldTrump despite his inability to coherently to string a couple sentences together and some serious ethical issues and poor financial management, but it wasn’t enough to overtake the 81m who voted for Joe Biden. Last week, a Gringrich’s successor to the House Speakership, KevinMcCarthy, suggested various “Deep State” plots (but no fake moon landings, yet). There are now not an insignificant number of Republicans in Congress who would be willing to shut down the government to facilitate regime change and help Trump get back into power, and avoid the possibility of his criminal conviction. This is not a sign for political or currency or interest rate stability. It will also affect the premium that US stocks trade at, and the value of equity indices.

ACTION PLAN: Review your stock holdings and ask yourselves are these stocks priced for perfection or are there better global alternatives. Contact TurnerStreet if you wish to buy the list of the stocks it buys for a typical wholesale client, or if you would like TurnerStreet to manage your equities and derivatives portfolio.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

May 25, 2023May 25, 2023 PPD1962 Asset Allocation|Cash|Debt|Equities

AA: debt default by the US government?

QUESTION: is a debt default by the US government likely? If so, what to do about it?

ANSWER: Probably, yes, so “risk-off.”

For a long time, I thought the Republican leadership in the US congress were crazy, but not so crazy to default on the government debt. However, when I consider how the crazies, and their supporters are now rationalising the January 6 US Capital attack suggesting pardons, et cetera, it isn’t obvious to me that debt default would be off the table. Why? Damaging the Biden administration and winning the MAGA supporters is the aim of Republicans and compared to invading the US Capital and the attempted insurrection, defaulting on debt is trivial.

The less likely alternative to default is massive upheaval by pushing all the way to the edge of default which will leave markets thinking it might just be next time.

The least likely outcome is the Republicans say sorry, and just do what every previous congress has done and increased the debt ceiling.

The solution for investment managers is go “risk-off” at least until we know whether default occurs in the next couple of weeks because even if it doesn’t, there isn’t a likely bounce for the reason outlined above and the general valuation of stocks.

However, even if you go risk off and the US government defaults, you might still have a problem depending where you put your money. What is considered going to cash is often exposure to 4-week US Treasury Bills: see most broker cash accounts; money market funds; “narrow” banks, etc.

DISCLOSURE: TurnerStreet Advisors went risk-off and into cash on 19 May 2023.