Retirement Investing Episode 4: ”My portfolio management process”

Investing principles that guide our decision making process: "Asset allocation is the major driver of returns"

An entire book can be written on all the major asset classes, but to avoid nerding out on you, let’s stick to the major stock asset classes used by the research company Morningstar that many financial advisors and institutional investors use to analyze portfolios, plus bonds and a few specialty asset classes.  

Major stock asset classes (Click on asset class to link out to the Investopedia definition)

Size:

• Large-Cap
• Mid-cap
• Small-cap

 

Style:

• Value
• Blend
• Growth

 

Bonds: Interest rate sensitivity

• Limited
• Moderate
• Extensive

 

Bonds: Credit quality (like credit score)

• High
• Medium
• Low

 

Specialty:

• Precious metals
• Commodities

 

The economic environment is the major driver of which assets outperform and under-perform.  

I’m going to simplify the economic environments as well:

1. The global economy is expanding and inflation is falling.
2. The global economy is expanding and inflation is rising.
3. The global economy is in recession.  

 

Keep in mind that many times (if not most of the time) different economies are in recession and/or expanding at different times.  

If you really want to get fancy, you can build a portfolio placing micro bets on different economies. However, there’s also a major global trend you can build your portfolio around as well and also do well overtime.  

The global economic trend is the trend I like to focus on and what I’m referencing in this post.  

Here are the asset classes that tend to do relatively well in each economic environment:

The global economy is expanding and inflation is falling:

• Large-cap stocks
• Growth stocks
• Bonds
• Credit quality: High
• Interest rate sensitivity: Extensive

 

The global economy is expanding and inflation is rising:

• Small-cap stocks
• Value stocks
• Precious metals
• Commodities

 

The global economy is in recession:

• Bonds
• Credit quality: High
• Interest rate sensitivity: Extensive, Moderate, and Limited

 

If Asset allocation is the major driver of returns, and the economic environment is the major driver of which assets outperform and under-perform, then understanding how to determine the economic trend is EXTREMELY important in investment process for Stone Hill Wealth Management.  

How to determine the economic trend (not predict it) that's mostly an art, but here are the 4 core things I analyze that have the most impact on determining the trend:

• Global trade trend
• Valuations
• Central bank policy
• How different asset classes are moving relative to each other

 

Phillip Washington, Jr.  is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.