Wondering where to invest in 2017? It’s a good question — one the Newport Investment Committee spends a lot of time assessing and managing. In times like these, we think it is more important than ever to have broad asset class diversification in your investment portfolio — with laser-like security selection.
After all, traditional asset classes are looking expensive. Take stocks for example: The post-election “Trump rally” has driven equity valuations to all-time highs. What’s more, investors appear to have forgotten about risk! We monitor a number of indicators that measure investor fear and we become concerned when it falls as low as it is today. Investors are feeling over-confident.
Bonds have experienced a “bull market” streak of rising prices/falling yields over a couple of decades. We believe many fixed income investors are not aware of the risk in their bond portfolios today.
What about alternatives, like real estate? Prices for multi-residential, commercial/retail assets are also frothy. This is due in part to insatiable investor demand for income-producing investments and an influx of foreign buyers.
What is an investor to do in this environment? And what is the Newport Investment Committee doing in the portfolios we manage?
Review asset mix. Rebalance as needed.
First, start by looking at your overall asset mix. How much is invested in equities — directly and indirectly? If you own balanced funds, what percentage is in equities?
We perform this type of analysis every day for prospective clients and many are shocked to discover that their “conservative” portfolios hold 70%-80% equities. We would be very nervous with that kind of exposure. Make sure you understand your equity exposure.
We are at the mid-point of our target ranges for equities. For a balanced portfolio, we hold 17% in Canadian equities and 29% in global equities. We are underweight investment-grade bonds. In both cases, the security selection is actively managed by specialists.
Exploit niche pockets of opportunity.
There are a few alternative asset classes where we are adding to our holdings. Private debt is one. Private real estate is another. We selectively added to our apartment building portfolio this year. Admittedly, these investments are less about our liking the asset class and more about our confidence in the singular ability of these niche real estate managers to buy the properties well and add value through their operational expertise.
At the risk of sounding self-serving, neither of these two asset classes is commonly available to individual investors, which is why we believe it is important to have the expertise of an active investment manager with proven expertise in traditional and alternative asset classes. After all, that’s how we manage our own money.
Keep cash on the sidelines.
We also currently have a high level of cash – approximately 16% in a balanced portfolio. Holding cash does two things. It protects capital in the event of a major correction. And it allows us to profit from a correction by having the cash to buy when stocks and other assets go “on sale.”
But not too much cash.
We would urge against going to 100% cash however if one is nervous. Trying to time the market is a mug’s game. You have to have perfect execution on two decisions and history is not on your side.
The first decision is when to sell; the second is when to buy back in. You could easily miss a bounce back and the capital markets have a notoriously long record of surprising investors – both up and down. Remember the night of the U.S. election? U.S. futures plunged 800 points before the market opened, only to recover and rally 6% in a matter of weeks! Few investors would have predicted this.