Market Watch : Assett Allocators’ Quest: Right Investment Mix : Equities: These financial pros suggest the proper package of stocks, bonds, other instruments and cash for the current economic environment.
Looking for a way to reallocate your assets now that oil prices have hit $40 a barrel and recession seems to be looming even larger than a few months ago? You are not alone. That’s what the pros are doing.
Asset allocators analyze the economy, world events and the stock and bond markets to determine whether you should own stocks at all--and in what amounts--as well as what amounts of bonds, cash and possibly gold or real estate you might hold.
Asset allocation is not merely the technique of not putting all your eggs in one basket, but also the art of knowing what basket to put which eggs in, and when. The “when” is important because events change perceptions, and perceptions as well as (and sometimes instead of) the numbers tend to drive investment.
So on Aug. 4, there was a change in the way that Morton Silverman, managing director of portfolio strategy for Piper, Jaffray & Hopwood in Minneapolis, looked at his investments. “After the Iraqi invasion, we redid the (computer) model, trying to find a previous period in crisis--and because of the event risk, the portfolio model went tilt,” Silverman said.
Money in equities was reduced sharply. Investments in U.S. stocks went to 20% from 35% and in international mutual funds to 15% from 20%. Cash doubled to 20% and fixed-income investments increased to 35% from 30%. Inflation hedges like natural resources went up to 15% from 10%. Real estate investment declined.
Silverman said the so-called equilibrium model--used when the world is calm and the economy stable--calls for 20% in each asset category. The allocations he is calling for now, less in stocks and more in bonds, is defensive and reflects the Persian Gulf crisis and doubts about the economy. Other portfolio managers and financial planners are into the same strategy.
“Our portfolio went from neutral, which was 30% stocks, 40% bonds and 30% cash, to 30% equities, 50% bonds and 20% cash,” said Robert Beckwitt, manager of Fidelity’s Asset Management Fund.
The heavier weighting of the bond portion of portfolios is based on the expectation of a sharp economic downturn. “We see a recession,” said Art Steinmetz, co-manager of Oppenheimer’s Asset Allocation Fund, who said he had increased the amount of money going into bonds to 45% from 35%, mostly in short- and middle-term issues. “We think the yields will come down and the prices (of bonds) will go up.”
“If you are getting a 9% return on long-term government bonds, and yields (on new bonds) drop, the value of your bonds can go up 10%. That’s a 37% return over three years,” Beckwitt said.
Financial planner Joseph Clinard Jr. said that while he had not changed his basic allocation, he was more defensive. “New money is being held in cash,” he said. “We are not buying new stocks yet but will be soon because we are looking for a bottom.”
What don’t money managers want now? Transportation, basic-materials stocks and real estate.
“We reduced the real estate portion of our portfolio and increased the fixed-income portion because of the likelihood of recession,” said Mark Snyder, a financial planner. “Where we had 15% to 20% in real estate, that is down to 5% to 10%.”
When will stocks come back? “When the (Federal Reserve Board) eases up interest rates, stocks do well. If the Iraqi situation were to end soon, and the Fed eased aggressively, that would be great for stocks,” Beckwitt said.
Few managers consider the recent rise in oil prices to be permanent, and they all said they expect prices to drop. The stock market, they said, has already reacted to events, dropping from close to 3,000 on the Dow Jones industrial average to below 2,500 before creeping up a little.
“I think oil will sustain itself in the $20-a-barrel range, but there might be a lot of volatility,” Beckwitt said. “But I don’t think even if there is a shooting war, that the stock market will drop another 500 points.”
