Asset Allocations Insufficient In The New Economy

Last week I wrote about some stocks to keep your eye on in what is now becoming known as the "New Economy". Whether or not you agree with the direction and steps that the government is taking is immaterial at this point, what is of the utmost importance is that you position yourself and your portfolio correctly.

I had the recent displeasure of having to sit down with my mother and do our annual estate planning get-together. I say displeasure because having conversations about death and life without Mom are sometimes a little unnerving. Anyway, as I was reviewing her financial statements,

I was shocked to see that she was back in the same old portfolio I had luckily pulled her out of a year ago!

So I called her advisor, and had reminded him of the conversation we had last year. Where was the exposure to commodities (oil & precious metals) and foreign currencies that I mentioned I wanted included in her portfolio? 

Now I'm not saying that I want Mom to become some sort of crazy day-trader with her retirement portfolio, but rather that I wanted her to have as many uncorrelated assets as possible in her portfolio. 

For the record, I was not satisfied with the advisors response that she has exposure to oil because Exxon (XOM) is owned by 2 of her funds and that she gets her foreign currency exposure from her ownership of Toyota (TM) and Pepsico (PEP)!   And this is coming from a guy with 30 years of experience at a well-known brokerage!

Not to pick on Jim or his firm, but their portfolio allocation models are WAY out of whack. So I did some looking around, and checked out a few of the free allocation models on-line. Guess what? Same problem.    It basically goes like this: take your money and invest in stocks, bonds, and cash. Divide up the pie based on age, risk tolerance, and goals, and then rebalance occasionally. Whoa!

We are now fully-immersed in the global economy!!!   Now more than ever it is extremely important to understand global themes and what that means for your investments. 

So what to do now? Well, it's not quite time to give up on Modern Portfolio Theory just yet.   However, it is time to re-evaluate how we break up that proverbial pie known as our investment portfolios. The key to investing in the New Economy can be summed up in 5 points:

1.       Use ETFs as your investment vehicle of choice. They are low cost, more flexible, and can help you diversify more efficiently than mutual funds.

2.       Add currency ETFs to your portfolio. It doesn't have to be a major percentage, but something along the order of 4-8% should be sufficient. A currency ETF like (DBV) or (UDN) should provide some diversity out of the dollar and of course you can always invest in another countries currency if you have something specific you like or create your own basket of them if you're not sure.

3.       Add commodity ETFs to your portfolio. Again, it doesn't have to be a huge percentage but you should have some exposure to gold and oil (GLD) and (USO). And you should also take a look at diversified commodity index (DJP).

4.       The total combined allocation toward currencies and commodities should be somewhere around 10%. A little more if you have a higher risk tolerance, or less if you don't.

5.       Rebalance frequently.   By rebalancing these assets more frequently then you might otherwise a traditional portfolio, you can be sure to capture gains and take money off of the table. (Be sure to look at the tax ramifications of this strategy to see if it is right for you if you wish to employ it in a non-retirement account.)

By knowing what is going on the world and what the politicians are doing to manipulate our markets, you can create a portfolio that can thrive under any circumstance. Because as we have seen recently, the traditional stock, bond, cash portfolio can no longer keep up in this fast-paced New Economy.