This is the time of the year when popular financial magazines produce their “Best Investments” lists for the New Year. Many of these articles include comments from professionals from all corners of the investment world including fund managers, advisors, and even hedge funds. Unfortunately, while well-intended, I think the goal of these periodicals is to get people to buy their products or even to subscribe to their publications.
Investors should resist the urge to act on the advice of any publication because it may not be appropriate for their situation. Most of these stories tend to focus on a singular investment theme as opposed to an overall portfolio, although some publications have improved their coverage of portfolio allocations over the past few years. The main point is few publications will have the “Best Portfolio Strategy” for 2016 on their covers because it may not generate enough interest from readers.
Focusing on your overall portfolio allocation is a far more important effort than is trying to find the “best” investment for next year. It is more challenging and takes more time, but it is worth the effort as investors enter 2016.
Other Year-End Thoughts
If you have constructed a diversified global asset allocation and have been tracking it against a broad stock market index like the S & P 500 Index, then you have been unhappy with returns the past few years. But remember, this is a sound approach that tends to work well over multiple market cycles, not just over a few years.
I happen to think that global diversification should be viewed as sort of an “undervalued” asset just like a stock can be when it declines relative to its earning potential. Global asset allocation has looked weak in the face of a raging bull market in stocks, but in reality, it is performing in line with our expectations. However, you have to keep in mind that portfolios are created differently and no two are exactly alike. Investors tend to compare diversified portfolios to all-equity market indexes routinely, but it is a faulty comparison.
Foreign stocks comprise two distinct areas: developed and developing. Developed regions include Europe, the U.K., Australia, and Japan. The developing regions, which are also categorized as emerging markets, are regions like China, Brazil, Russia, Eastern Europe (Poland, etc.), the Middle East, and Mexico to name a few. As a firm, we happen to believe that despite the challenges in places like Europe and China, these markets look like good investment opportunities in the years ahead.
The performance disparity between domestic and foreign stocks has been uncharacteristically wide, and we do not believe this trend will continue over the next market cycle. Europe and China currently dominant the headlines coming out of foreign markets and this negative bias can, at times, lead to improved performance. China is going through structural economic changes that have resulted in slower growth, but hopefully more sustainable growth down the road. Europe has its own structural issues to contend with, and thankfully, the leaders there are finally taking aggressive action to improve their economic climate. Avoiding foreign markets altogether may help your current state of mind, but it may reduce your investment options.
Nontraditional Asset Classes
This area has been as much a struggle as foreign stocks over the past five years or so. I define these areas as being anything other than traditional stock and bond funds. These would be areas like Master Limited Partnerships (MLPs), natural resources, and real estate to name a few. These asset classes have shown attractive diversification benefits relative to stocks and bonds over various market cycles, but some of them have been negatively impacted by the drop in commodity prices.
In the end, investors may want to consider using asset classes that do not behave like traditional stocks and bonds, which is the main attraction of using so-called alternative asset classes.
Bonds are going to have to contend with the possibility of rising short and long-term interest rates because of either Federal Reserve policy changes and/or an improvement in our economy. As interest rates go up, bonds can lose value, which is well-documented. The most important point about bonds is to understand their role in diversified portfolios. Their primary role is to cushion stock market volatility, and despite the challenges of rising rates, they continue to play that critical role in long-term portfolios.
Remember, staying focused on a solid investment strategy and having a diversified portfolio, and not relaying on magazine cover advice, will be important in 2016 just like it has been in any other year. So my advice is to look at your long term goals as an investor, adjust your portfolio if needed, and stay focused.
Best of luck to all investors in 2016!