Millennials Need Safe Investments: Asset Allocation Daily

by: SA For FAs

Summary

Aubrey Basdeo: Investors are struggling to find assets that move in the opposite direction from each other, leaving portfolios exposed to synchronized losses.

James Picerno: The U.S. economy has peaked and is decelerating.

Thought For The Day: The standard advice that the young have longer time horizons and should therefore invest heavily in stocks fails to account for their higher income volatility.

Rising Stock/Bond Correlations

“As fixed income and equity markets seem to have shifted to risk-off, investors are struggling to find assets that move in the opposite direction from other assets, leaving portfolios exposed to synchronized losses even if they are diversified. Specifically, the recent performance of stocks and bonds have been moving in the same direction: down.” (Aubrey Basdeo)

Trade-War Casualties

“China has boosted the amount of soybeans that it imports from Brazil, the world's largest producer of soybeans, and has also begun to substitute other crops for U.S. soybeans to make up the difference. More remarkably, China's leaders have also chosen to reverse an initiative to improve the quality of soybeans that it imports and will now accept diminished quality in the soybeans they acquire, which may negatively impact the quality of its hog production.” (Ironman at Political Calculations)

Binary Events

“Heads you win, tails you lose. Assuming the coin is fair, your odds on this event are 50-50. But are there binary events in the market where odds are not 50-50, but rather skewed in your favor? And are there binary events where the payouts are also skewed in your favor?” (Jeff Miller)

Growth Slowdown

“The numbers suggest that the US economy has peaked. Growth will likely prevail for the near term, but the best guesstimate at the moment calls for another round of deceleration in economic activity as 2018 heads into the final stretch.” (James Picerno)

Market Scorecard

“Through the 10 months ending October, the US 3% return outshines every country and the foreign market as a whole, which has lost 7%. Unlike the US where growth stocks have been in favor, growth stocks have been out of favor in the rest of the world.” (Ronald Surz)

Thought For The Day

Yesterday’s article proposed that there was always merit in maintaining a conservative portfolio, since such a portfolio hedges against uncertainty, and uncertainty is unceasing. Today I wanted to briefly amplify that point by making the non-obvious suggestion that such an approach makes sense for millennials and other young investors as well.

This goes against the standard advice, which is that the young have longer time horizons and should therefore be heavily invested in stocks. At the other extreme are millennials themselves, and Gen Xers who, scarred by the Great Recession, skew towards cash in numerous surveys. Here’s one from Bankrate.com:

Three in 10 millennials say cash is their favorite long-term investment, while each successive generation lays claims to stocks – a third of Gen Xers, 38 percent of baby boomers and 44 percent of the Silent Generation.”

I would dispute both of these approaches. Cash is not a long-term investment because it loses value to inflation over the long term. But here’s the problem with equity-heavy approaches:

Younger people in general have less secure employment. They need a cash cushion more than most to help them ride out their inherently higher income volatility. That volatility is highest in recessions, which tend to coincide with stock market crashes. Losing your job and the value of your investments at the same time, especially when the former requires you to redeem shares in the latter, is a bad way to pave a path toward financial independence. It is from such scars that people end up forswearing stocks forever.

For that reason, even young people would do well to divide their savings into a reasonable mix of equity, property and liquidity holdings.

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