In This Market ‘The 60-40’ Portfolio Does Not Work

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$DIA $SPY $QQQ $RUTX $VXX $VIX

When financial assets move pari parsu, portfolio diversification becomes hard to achieve“– Paul Ebeling

Since the advent of QE in Y 2008 safe-haven assets have become not much of a safe-haven.

During that frame, we have seen unprecedented market moves with government bonds falling with stocks with regularity.

In a repeat of Y 2018’s action, the correlation between safe-haven and risk assets went positive from time to time.

This comes as no surprise because world central bank purchases flood the financial system with cash, the buy everything trade seen a the thing to do.

So, when financial assets move side by side, portfolio diversification becomes hard to achieve.

In the past traditional portfolio made up of 60% stocks and 40% bonds, this is not a valid strategy now. A market where everyone buys or sells at the same time is fine as long as monetary policy remains expansionary, but when inflation finally starts to accelerate and central bankers turn less accommodating, like in occured in Y 2018, then investors in all types of assets go for the exit at the same time.

Volatility has collapsed in the QE era, in those periods when it has increased, it has generally risen Fassst created pain for investors.

Take the CBOE Volatility Index, or VIX. Even though it is more likely to stay below 20 these days, it is 2X as likely to spike above 40 when it does rise.

Today, there are few humans involved in trading, market makers hold only 10% of the trading inventories they held in Y 2007, according to data from the Federal Reserve Bank of New York. As a result, they are unable to act as a market shock absorber during frames of rapid price swings like they had in the past, they cannot block Capital Flocking.

Here is a good example: Last March, ETTs owning investment-grade corporate bonds experienced price declines exceeding 10%, dropping 4% to 5% below their net asset values. The Fed, concerned that the action could cause credit markets to stop functioning, it stepped into the markets to buy corporate debt for the 1st time.

The Big Q: How can investors navigate very volatile markets and survive at a time when there is nowhere to park and hide cash?

The Big As:

  1. Stocking up assets considered to be of mild risk and bets that can outperform a portfolio fully invested in low-risk assets, which are already priced for perfection due to central bank purchases.
  2. Hold more than enough cash, 25-33% of a portfolio, cash gives investors an invaluable opportunity to buy assets in a fire sale, when everyone else is running for the exit.
  3. Understand that active management can provide benefits. Many years of QE have created lots companies that would otherwise be out of business if not for central bank largesse aka zombies.
  4. Learn which sectors and firms are tomorrow’s winners and losers will be a Key driver of performance going forward.

President Trump’s strong economic plan is focused on the real economy and public services has brought growth back to the Red states and the black community left behind for decades. This will generate Fassster inflation which is the Fed’s target making the economy and financial markets stronger overall.

Yes, the 60-40 formula is a by-gone investment strategy for the markets today are too volatile for such a strategy of yesterday-year to work effectively. Personally, I believe in a balanced portfolio – one with some cash for living expenses (mainly, to prevent forced selling) and investment opportunities) and some precious metals for potential returns Add to this, a small amount say 5% for fun – speculative stocks, like new high tech or  some unique medical stocks and perhaps CBD type companies for potential growth. 

Now in my core Aristocrat investment portfolio are the old traditional stocks, like oil and base manufacturing, but this is my approach. So far, it works and while not totally risk proof, it has a little flare for excitement and potential real growth, important today to say ahead of inflation. 

Initial Public Offering (IPOs as they are often referred) stocks should be viewed as short term for retail investors, they will not portions of book runner brokers allotments, those are for professionals. They sometimes offer quick return investment opportunities unless there is definition for high substantial earnings growth which is the true measure of most stocks as in ivestment opportunities.

Be cautious on the tendency to believe that the yields on Government and most corporate bonds. They are not overly appealing for me nor the old fashioned 60-40 ratio which in this market, I do not believe that it works.

Be careful of those investment advisors who sell the theory of a balanced portfolio – one that is divided equally between stocks and bonds. Instead measure potential investments on risk/return and be able to withstand a loss if an investment turns southernly one you,” says professional investor Bruce WD Barren. 

Have a healthy week, Keep the Faith!

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Paul Ebeling

Paul A. Ebeling, a polymath, excels, in diverse fields of knowledge Including Pattern Recognition Analysis in Equities, Commodities and Foreign Exchange, and he is the author of "The Red Roadmaster's Technical Report on the US Major Market Indices, a highly regarded, weekly financial market commentary. He is a philosopher, issuing insights on a wide range of subjects to over a million cohorts. An international audience of opinion makers, business leaders, and global organizations recognize Ebeling as an expert.   
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