MAGIC BULLET? STICK TO BASICS
by Chris Beringer
The future of the global economy looks uncertain. Europe is drowning in debt, Japan has suffered two lost decades and the United States is struggling to rebound from an historic housing and banking crisis. Politicians continue to disappoint and although central bankers have good intentions, reducing interest rates to record lows has not fixed the problem.
China and India appear to have compelling growth stories, but their futures could very well be linked to more developed markets. In addition, foreign investment is hampered by government regulation and accounting practices in these nations are questionable.
On the other hand, even when economies are churning along the media likes to focus on the negative. Corporations appear to be healthy, posting record earnings. The financial sector may continue to struggle, but the world has seen the danger of allowing a major bank to fail (Lehman Brothers), and in the event of another major credit crunch, government intervention is almost assured.
In the middle of all of this, the stock market swings wildly, for no discernible reason, like a pendulum gone haywire.
What's an investor to do?
The investment team at The Beringer Group sees no magic bullet. We advise on $3,500,000,000 that is made up of high net worth individuals, family investment companies, family foundations, and of course, our own money.
We are sticking to asset allocations, and when designing our portfolios we keep in mind one simple and time-tested idea: the key to any successful asset allocation is finding the proper balance between safe assets and risk assets.
Clearly, the central component of any asset allocation model is safety. There are still assets that provide principal stability, and we make it a point to identify and utilize them.
These assets include U.S. government paper, select municipalities, and certain corporations. It is true that the U.S. may continue to have challenges, municipalities could face revenue decreases and corporations could suffer as well, but we do not feel that there is a risk of default on a grand scale on investment grade paper. If these assets don't default, the investor should receive his principal back at a future date with an income component.
Some people might argue that with rates where they are today, those instruments are poor investments. Such people are overlooking the real value of those instruments: a promise of principal repayment allows for asset stability.
The second component of a strong asset allocation should include some percentage of risk assets that will allow the portfolio to keep up with inflation and the investor's spend rate. We do not feel that the world is going to enter a long-term deflationary period, which means that the value of a portfolio will erode by doing nothing. There are a lot of risk assets to choose from. Undoubtedly, we will know which ones performed best in about ten years time. For now, unless you know someone with an extremely accurate crystal ball, the best way to participate is simply to own them all. These include domestic equities, developed international equities, private equity, emerging international equities, international government debt, high yield issues and commodities.
I intentionally left hedge funds off of the list, even though some in the investment community might disagree. Hedge funds are merely a wrapper and the individual investment strategy within that wrapper might be considered a safe asset or a risk asset, depending on the circumstances.
In summary, portfolios should be divided between safe assets and risk assets. Safe assets provide portfolio stability and allow the investor to sleep at night. Risk assets provide the portfolio a hedge to combat inflation and make space for withdrawals. The allocation of safe assets and risk assets should be determined by the investor and his/her investment advisor, and is different for every portfolio.
In uncertain times, remembering time tested core philosophies and keeping it simple is the path to success.