In fact, as of the end of the third quarter of 2016, mutual fund flows (an excellent indicator of small investor behavior) showed that the average investor was underexposed to the U.S. stock market and overexposed to the bond market. Hedge funds and other expensive “alternative” investments have also recorded generally dismal returns, leaving many investors to wonder why they are paying high fees and taxes for such mediocre results.
We favor a more broadly diversified approach, incorporating foreign markets, commodities and bonds to balance out the volatility that will surely result as a new administration and Congress attempt to sift through an audacious agenda of tax, health care and regulatory reform. We think investors should get used to diversified-portfolio returns in the mid-single digits as rates stay relatively low and stock market returns don’t match levels of the past three years.
US foreign relations improve and help drive global markets higher
This is our boldest prediction. We believe the character qualities and personality traits that make a political leader unlikeable can be the same factors that sometimes make one successful.
Harsh rhetoric aside, we believe Trump will realize that shutting off the rest of the world to the U.S. in the name of holding onto Rust Belt jobs is counterproductive. We think he will seize on an opportunity to improve international relations rather than risk global calamity. His intense desire to be a “winner” should propel him to improve trade relationships with China and Mexico.
He also sees the benefit of a unified Europe and in cementing ties with Merkel. The U.S. can help Germany avoid political turmoil, bringing stability to the EU in the face of Brexit. He recognizes that he can’t unilaterally break the Iran nuclear deal, and instead will work with Putin to negotiate a permanent cease-fire in Syria, thereby marginalizing ISIS.
As these geopolitical tensions ease, investors should see value in markets outside of a fully priced U.S. stock market, and as a result, push foreign markets higher.
No one, including Nobel Prize-winning psychologists, can consistently predict what’s going to happen, and more importantly, when it’s going to happen.
Staying diversified and paying attention is a time-tested way to preserve and grow your investment portfolio.
Mark Eshman is co-founder and CIO of ClearRock, an SEC-registered investment advisor with offices in San Francisco and Sun Valley, Idaho. ClearRock clients currently own JNK, ITA and STIP. Contact: [email protected]. For a full list of disclosures, please click here.