Sectors and Asset Classes

Q: I am receiving some extra cash as a result of maturing CDs. I want to make a safe investment that is protected against future inflation. We do not need this money, and so I am interested to know what you think of purchasing I bonds for our grandchildren. I have heard they can be tax free if used for college.

“Structured products’ risk-reward ratio is worse than you think.”

Adding bonds to an all-stock portfolio can boost returns and lower volatility, especially in choppy markets. Bonds should be a small but important part of your gone-fishing portfolio allocation.

International bonds now make up more than 35% of the world’s investable assets, and yet many domestic investors have little or no exposure to these securities.

Hard assets have been one of the most significant asset classes over the last decade. From all indications, it will continue to be a critically important investment category to protect your portfolio from the effects of inflation and the continuing devaluation of the U.S. dollar.

David Marotta discusses why real estate should be part of a portfolio asset allocation.

Even in our gone-fishing portfolios we suggest investing more overseas than in the United States. For most investors, foreign stocks will be their largest and most important allocation. Including the right mix of foreign stocks will help you relax and go fishing no matter which foreign seas are in turmoil.

Creating a gone-fishing portfolio begins with a top-level asset allocation. We use six asset categories. The three for stability are short money (maturing in less than two years), U.S. bonds and foreign bonds. The three asset categories we use for appreciation are U.S. stocks, foreign stocks and hard asset stocks.

In 2010 I published a column entitled “Now’s Still the Time to Buy a House.” Investing is like chess in slow motion. It is important to review your moves to see how they turned out. Sometimes they don’t turn out well. Our prediction about real estate, however, was brilliant.

Finding countries where you can plant your investments in fertile soil may be one of the most important asset allocation decisions you make for the next several years.

Perhaps dire predictions are correct and we are headed to Armageddon. If you want liquid assets in such a catastrophic situation, try buying cases of Jack Daniels. It is cheaper, keeps just as well and will fetch more in trading value.

A few months ago Bill Gross, co-founder of PIMCO and the country’s most prominent bond expert, singled out those countries heaping significant deficits on their mountain of debt and called them “The Ring of Fire.” We recommend that you reduce your investments in these countries.

Real estate could be a great investment right now.

Everyone is expecting real estate to underperform the stock market for many years going forward.

Rebalancing between asset classes boosts returns and decreases volatility. But setting your asset classes based on sectors of the economy is not an effective strategy.

Diversifying your portfolio means finding assets that have value on their own merits but do not move exactly alike. A critical investment metric called “correlation” is used to construct a portfolio most likely to meet your personal financial goals.

Gold may glitter, but it is still better to own the mine.

Just over two years ago, we warned our readers that real estate prices might be peaking and ready to correct.

One of the asset classes that we use to build diversified portfolios consists of hard asset stocks.

Canada is the one major country that is not included in the EAFE (Europe, Australia, and Far East) foreign index. Not only are they good neighbors but a good investment.

Like the iron rods in sailing ships, bonds keep your portfolio upright in stormy weather.

There are many things riskier than volatility.

Baring a real people’s revolution, it will take until 2050 for China to complete their slow march to free markets.

Overweighting investments with average higher return and lower risk is a win-win situation.

The value of any asset category does not go in one direction forever. The housing prices boom shows signs of weakness, and that they may correct or at least under perform for the next few years.

If the S&P were a financial advisor it would say, “Let’s buy mostly large cap growth stocks in the industry that did well last year with a high price per earnings ratio.”

It is usually better to be a seller of options than a buyer of options.

All investors should have a certain measure of foreign investments. That may sound scary, but not as scary as putting all your eggs in one country’s basket!