3. Build your portfolio for bad times as well as good. Portfolios, like houses, need to withstand the occasional shock. In the case of a house, this means retrofitting, earthquake insurance and bolting down the wine rack (as a bourbon drinker, my earthquake-related bottle losses were thankfully limited).
Recently, some investors have been ignoring this lesson. No matter how attractive or cheap stocks are, few investors should be 100% in equities, with the possible exception of the very young and very brave. But the longer the bull market goes on, the more tempted many investors are to abandon other asset classes and seek the higher returns of stocks. The problem is this behavior can leave you maximally exposed to markets at exactly the wrong time.
Investors need to build a portfolio consistent with their objectives, and for most, that means a portfolio that can offer downside protection as well as upside potential. This means it’s important to have some long-term strategic allocation to safe-haven assets – Treasuries, cash and gold – that tend to appreciate, or at the very least hold their value, when everything else is collapsing. While these assets may be a drag on returns today, they serve a purpose over the long term.
One final, non-financial point. Movies featuring an earthquake invariably have a scene with an animal getting agitated before the quake begins. In retrospect, this seems to be a bit of Hollywood fiction. Every single person I know said the same thing: their dog slept through the entire quake. In our case, the only reaction by our golden retriever was to look visibly annoyed when my wife turned on the lights. It seems we interrupted his sleep.
Source: BlackRock
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.