The past two years of financial market turmoil have left investors wondering about portfolio allocation- stocks or bonds? Although exchange traded funds (ETFs) have made diversification across both securities easier, you still have to decide how much to invest in each one.
At a recent investment conference, star fund manager Chris Davis predicted that stocks would outperform bonds in the future, reports Chuck Jaffe of the Boston Herald. Fittingly, sitting next to Davis was Jack Bogle, the founder of Vanguard Group, who has more than 80 percent of his personal portfolio in bonds.
When asked if his portfolio reflected a contrary stance, Bogle said no. Surprisingly, Bogle actually agrees with Davis’ prediction that stocks look to outperform bonds in the coming decade. Specifically, he thinks that stocks can generate 7% annual returns compared to 4.5% for bonds. Then why does he have 80 percent in bonds?
Bogle said that more than worrying about market timing, an investor should stick to his/her allocation plan. “I do not believe that we should rethink the old principles of asset allocation,” Bogle said during an interview with Morningstar. “If you could do it perfectly, I strongly commend it, but I don’t think anybody is able to do that,” he continued, referring to market timing ability. [5 ETF Trading Rules.]
But stocks and bonds are not the only assets available to diversify a portfolio. Simona Paravani, an HSBC strategist, stretches the traditional concept of asset allocation to include commodities and private equity, reports Pratap John of Gulf Times. She believes it is essential for investors to consider commodities such as gold to hedge against inflation, and to diversify into emerging market currencies to capture global growth. [How to spot an ETF Bubble.]
Naturally, we believe in looking at things a different way. Beyond looking at a portfolio for its level of diversification, we also employ a trend following strategy to ensure that we’re in areas with a potential long-term uptrend and out of those that are losing steam. We do this by using the 200-day moving average, which you can read more about here.
ETFs have made this possible, thanks to transparency, low cost and intraday liquidity. It’s time to rethink the old way of investing.
For more stories about trend following, visit our trend following category.
Sumin Kim contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.