Jack Bogle, founder of Vanguard Group, has maintained a very simple personal investment strategy for many years: 60% U.S. stocks, 40% U.S. bonds. Now age 84, he has recently shifted to a 50/50 portfolio mix, explaining “I just like the idea of having an anchor to the windward,” and, “I’m not so much worried about having my portfolio grow.”
Bogle’s approach is based on a few broad principles. Research tends to support his view that a passive strategy to mirror the market is better for an investor over the long term (a controversial idea when he advanced it over 40 years ago). Bogle’s other principles are more controversial. He doesn’t believe in rebalancing — “If you want to do it,” he says, “once a year is probably enough.” He doesn’t invest overseas because “we have the best investor protections and legal institutions,” even though U.S. companies derive at least 50%of their revenue from outside the U.S., and even though Bogle’s firm, Vanguard Group, has produced research suggests allocating 20% of a portfolio overseas. Third, Bogle diversifies exclusively through bonds and has increased the allocation to bonds as he ages to protect against risks from a short-term drop in stocks. Research suggests that stocks are the best long-term investment vehicle, but that bonds protect against stock market losses that might coincide with times when the investor needs the money. Finally, Bogle recommends taking an approach that is “simple” because it reduces the investor’s worry and protects against emotion-based decision-making.
Mohamed El-Erian, says to expect major volatility in the coming months — volatility that will create some great opportunities.
“We have a bumpy road ahead of us, but I keep on stressing, it will create a lot of attractive opportunities,” he told CNBC. El-Erian said the global market may experiencing a shift to a “higher volatility regime,” meaning that asset allocations will become aggressive and price multiples will begin “looking high.” That’s when markets overshoot and act with too much correlation, creating the opportunity is, he says.
He also says that opportunities may well be occurring in emerging markets and oil, but he advises caution. “If you already have exposure, wait a little bit, there are going to be even more attractive positions—there are still people stuck in those markets looking to get out,” he said. “We’re going to look back on this, and this is going to be a very attractive stage. … It’s one of these things that happens once a decade… but be careful because it’s going to be incredibly volatile in the next few months.”
El-Erian also says investors would be wise to stop obsessing so much over potential interest rate hikes. He says the tightening cycle, if and when it occurs, will likely be the “loosest tightening in the history of the Fed”.
Conventional wisdom seems to be that the best way to deal with looming interest rate hikes is by buying only short duration bonds, or dumping bonds altogether. But in a recent Forbes column, DoubleLine’s Bonnie Baha takes aim at those notions.
Mohamed El-Erian says we are seeing a “classic overshoot” to the downside in emerging markets right now, which should lead to more pain in the near term but opportunity over the longer term.
While stocks are up slightly this year, Marc Faber of the Gloom, Boom & Doom Report says that a “stealth bear market” has been going on under the surface.
Wells Capital’s James Paulsen says a commodities rebound will depend on what the dollar does, and he thinks the dollar has been in “peaking mode” since March.
Top value fund manager Stephen Romick continues to be wary of the current stock market environment, and has a big chunk of his portfolio in cash.