Some Sage Advice About Asset Allocation

Asset allocation is the one question that I get every day, which I absolutely cannot answer.

The reason is simple: no two investors are alike.

The answer varies whether you are young or old, have $1,000 in the bank or $1 billion, are a sophisticated investor or an average Joe, are in the top or the bottom tax bracket, and so on.

This is something you should ask your financial advisor if you haven’t fired him already, which you probably should.

Having said all that, there is one old hard and fast rule, which you should probably dump.

It used to be prudent to own your age in bonds. So, if you were 70, you should have had 70% of your assets in fixed-income instruments and 30% in equities.

Given the extreme overvaluation of all bonds today, and that we are probably already in a 30-year bear market, I would completely ignore this rule and own no bonds whatsoever.

This is especially true of government bonds, which are yielding near zero interest rates in Europe and Japan, and only 2.23% in the US.

Instead, you should substitute high dividend-paying stocks for bonds. You can get 4% a year or more in yields these days, and get a great inflation hedge, to boot.

You will also own what everyone else in the world is trying to buy right now, high-yield US stocks.

You will get this higher return at the expense of higher volatility. So just turn the TV off on the down days so you won’t get panicked out at the bottom.

That is until we hit the next recession. Then all bets are off. That may be three years off, or more.

I hope this helps.

John Thomas
The Diary of a Mad Hedge Fund Trader

 

Under or Over 70?