In prior editions of CIO Insights, we’ve written about the value of portfolio diversification in the face of uncertainty and risk caused by macroeconomic and geopolitical conditions. Given the current state of the world, it seemed high time to revisit this topic. In addition, we’ll highlight the thinking and positioning behind our own asset allocation portfolios. We hope to give you some idea of the modest sorts of adjustments we typically make, as opposed to wholesale moves in and out of asset classes in response to market movements.
Read Wittman’s full Q3 2016 CIO Insight: Diversification Still King
Balanced Approach, Modest Adjustments
The financial press is filled with headlines about economic and stock market trouble in China, and the United Kingdom’s vote to exit the European Union. While these are potentially important events in their own right, they are not, in fact, the sorts of things that should guide your asset allocation.
Rather, as we have written in other CIO Insights in more detail, the success of your financial plan is largely determined by your own actions, such as the rate at which you save and your mix of stocks and bonds. As a result, we believe the single best thing you can do to ensure your success is to speak with a financial professional about your saving and investing goals in order to develop a balanced plan to achieve them.
A well-diversified portfolio is important in this effort because the diversification allows you to potentially maximize return for the risk you take, or to reduce risk for a given level of returns. Once you have established an asset mix appropriate for your goals, risk tolerance, and time horizon, then it is possible to speak about making portfolio adjustments on the margin as markets move.
Opportunities in Equities Remain
Turning to our own asset allocation portfolios, we remain modestly overweight stocks. While stock valuations on the whole are not compelling, we think there’s a solid argument for favoring stocks over bonds in a balanced portfolio. This is true when you take into account the historically low level of interest rates on bonds and cash. Of course, this could change when the Federal Reserve does in fact raise its short-term rate target.
In addition, it should be pointed out that just under the surface of the market there have actually been significant rotations and rolling corrections at the industry and sector level going back at least to 2015.
So while the market as a whole may be considered overvalued by some measures, there are a number of sectors and industries within the market that we consider to be attractive. This ability to differentiate among individual stocks, industries, and sectors is in fact one of the hallmarks of active management and is a central argument for active over passive investment approaches.
Global View Mixed
The continued divergence in economic conditions and interest rate policy between the U.S. and much of the rest of the world has important implications for stock and bond positions.
With respect to equities, better growth in the U.S., rate differentials, and the view of our Global and Non-U.S. Equity investment team all lead us to favor U.S. equities over those of developed and emerging markets.
But those same economic and monetary conditions argue for the exact opposite positioning in fixed-income land. As a result, we favor non-U.S. bonds relative to Treasuries at the margin in our fixed-income allocations.
- Our Views on the Brexit Vote
- CIO Insights: Macro Events in a Micro World
- Build a Diversified Portfolio with Mutual Funds
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Diversification does not assure a profit nor does it protect against loss of principal.
The opinions expressed are those of Scott Wittman, CFA, CAIA, and are no guarantee of the future performance of any American Century Investments portfolio. International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
For educational use only. This information is not intended to serve as investment advice. Past performance is no guarantee of future results.