Keep a Defensive Stance, and Be Selective
Today, I’m releasing new asset allocation targets for long-term oriented investors of all ages, as well as active traders. Remember, these are aimed at a general audience and are not personalized recommendations for any single investor. Consider your own personal goals and risk tolerance when making your final selections.
I’ve made two updates recently. First, I added a brand new asset class: Cryptocurrency.
Bitcoin, Ethidium, Litecoin, and other cryptocurrencies are exploding in popularity in 2017. This is only the beginning of a long-term trend though. We’ll see these digital currencies fully enter the mainstream over the coming decades. For now, I’m suggesting only a small allocation, close to 1% of total assets.
Make sure to spread this allocation across a bunch of different digital currencies: at least 10 different ones, the more the better. Keep the most in Bitcoin for its (relative) stability and wider acceptance, but include some investments in smaller ones too (known as “altcoin”). The majority of “altcoins” will ultimately become worthless, I believe, due to their ease of creation – but you are looking to invest in a basket of many of them, so you end up with at least one that explodes in value (20x, 50x, or more) and dwarfs the losses in the ones that don’t pan out. Altogether, don’t put any more than 2% of your assets into this area unless you carefully research it and you know what you are doing – don’t gamble with your money. If you are closer to retirement or just a conservative investor, you might want to buy a tiny amount of Bitcoin (less than 0.5% of assets), let it sit, and just leave it at that.
Cryptocurrency carries many of the same benefits as precious metals (PMs), such as anonymity and preservation of purchasing power over the long-term. Yet there are key differences, the most significant being the high degree of volatility in digital currency. It’s still a very new market, therefore we can expect high volatility to continue but also tremendous potential for growth. Wait for a bit of a pullback before investing, but don’t get FOMO (Fear of Missing Out). It’s not too late to jump on board: cryptocurrency is the real deal and a legitimate asset class already.
For more information on cryptocurrency, check out Coinbase, where you can set up a digital wallet and make an investment, and Let’s Talk Bitcoin, where you’ll find links to a variety of podcasts and blogs about the subject.
The second update I made was to increase the allocation to real estate by a few percentage points. Many investors will already have this much exposure to real estate through equity in their personal residence. For those that don’t, REITs will get you there. Listen to my introductory podcast on REITs to learn about this exciting asset class. I also recently published a video on one of my favorite picks. I’m careful to choose REITs that I think are most likely to maintain or grow their share price over the long term while paying a good dividend yield. Stay away from most REITs in the health care, office building, and retail areas.
OK – now for the asset allocations.
If you’re a long-term oriented investor, making adjustments to your portfolio only a couple times each year, these are the baseline targets:
If you are an active trader, consider these allocations instead. They’re based upon the long-term targets, but adjusted for my latest intermediate-term market outlook (6-18 month horizon). These change much more frequently, as chart patterns emerge and develop.
You read that right: 0% to equities. This is not the time to be reaching for dividend yield or jumping onto a trendy growth stock. You can still keep some stocks in your portfolio, but put on some tactical short positions in the weakest areas of the market so that you’re market-neutral overall. You might also consider preferred stock for the greater protection it provides, over common stock, but remain cautious because preferred stock will drop if we see a big downturn in the market.
Wealth-building is a marathon, not a sprint. Staying defensive in a market like this one will keep your portfolio intact. A big cash reserve will position you to leap on bargain prices when we see them.
Going forward, members of our community platform will receive updated asset allocations at least one week ahead of when I release them to the public blog. Members will also get detailed sector-by-sector breakdowns within several of these asset classes (e.g. retail stocks vs. utilities, consumer staples, etc.). Membership starts at only $5/month for the Bronze level.