Diversifying your investment portfolio will go a long way in building wealth. Since each asset class has different levels of risk and return, spreading your investments across different classes such as stocks, bonds, cash, and other assets helps protect your investment from being impacted by major economic downturns or unexpected market events.
At the core of asset allocation is the tradeoff between financial risks and returns. Therefore, having the right mix of assets and bonds is important. Based on available information for each investment class as of January 15, 2021, our insights and recommendations for asset allocation are as follows:
U.S. Large Cap
Our U.S. equities are currently overweight relative to our global benchmark whereas our U.S. large cap stocks are currently underweight relative to our U.S. benchmark. Our U.S. large caps are balanced between value and growth styles with an overweight to the information technology sector. Our allocation to hedged equity provides some protection against downside market risk.
Our mid and small cap stocks are currently overweight relative to our benchmarks with a balance between value and growth styles. We expect mid and small cap stocks to perform well relative to large caps as the market broadens in anticipation of continued economic recovery in 2021. Mid and small caps may also benefit from potential buyout activity.
Our international equities are underweight relative to our global benchmark. We expect performance to improve relative to U.S. equities in the long term due to improving fundamentals, attractive relative valuations and dollar weakness. Our current international portfolio is partially hedged for currency risk.
Our emerging market equities are currently underweight relative to our global benchmark. We expect emerging market equities to outperform U.S. and developed international equities over the long term due to faster economic growth rates, improving fundamentals, attractive relative valuations, and dollar weakness.
Note: Global Benchmark is defined as: 54% US large cap/4% US mid cap/2% US small cap/27% developed international/13% emerging market.
U.S. Investment Grade Bonds
Corporate credits are overweight versus governments, which is focused on investment grade quality and neutral duration relative to our benchmarks, based on our current interest rate outlook. Our allocation to non-indexed bonds provides added diversification and return opportunities.
High Yield Bonds
Our focus is on the higher quality segments of the high yield market, with some emphasis on the BB sector of the credit markets for upside opportunity. High yield spreads are very tight on a historical basis, but extremely low interest rates justify an allocation to the space by providing higher yields. Defaults should remain manageable due to an improving economy.
Emerging Market Debt
Emerging market debt provides an opportunity for higher yields and added diversification for our fixed income and total portfolios. Our focus is on both local and U.S. currency bonds with a tilt toward sovereign credits.
We do not currently have an allocation to developed market sovereign and corporate credits. Yields remain relatively more attractive in the U.S. versus overseas.
We currently do not have a dedicated allocation to real estate. We gain exposure to the sector through investment in stocks of companies engaged in the real estate industry. We would consider adding to the sector when we perceive improvements in real estate fundamentals.
We do not have a dedicated allocation to gold. Gold does not provide a yield for our portfolios and is used primarily as a hedge against inflation and market uncertainty. Any exposure to the gold and precious metals sector would come through investment in stocks of companies engaged in these industries.
We do not have a dedicated allocation to commodities. Any exposure to the sector would come through investment in stocks of companies engaged in the commodities industries.
We currently do not have a dedicated allocation to infrastructure. Any exposure to the sector is gained through investment in stocks of companies engaged in infrastructure spending. We believe there are challenges to investing in this space through marketable securities, and that private investments are the best alternative in this category.
We do not currently invest directly in cryptocurrencies due to their volatile and speculative nature. Any exposure to these assets would come through our investment in stocks of companies engaged in cryptocurrencies.
- Do note that the information provided is general in nature and based on our understanding of available information as of January 15, 2021. Please consult your financial advisor to discuss how the information presented here may impact your investments.