The classic model of the portfolio of liquid financial instruments for a private investor in the last 30 years was considered the formula "60/40": 60% of shares, 40% of bonds. According to the calculations of JPMorgan Asset Management, the average annual yield of such a portfolio in 1999-2018. amounted to 5.2% in dollars. But in the next 5-10 years, during the new business cycle, such a model portfolio will be able to provide substantially smaller income, and it will bring losses at all, the well-known investment houses have calculated. Do investors have a chance to make money on financial assets more?
What happenedAt the heart of the calculations of JPMorgan Asset Management lay the model portfolio, 60% of which was invested in the S & P 500 index and 40% - to the US Bloomberg US Aggregate Index index. The selected period is indicative for investment analysis and conclusions, as it includes two very difficult for stock markets of the year, when the MSCI WORLD shares index decreased significantly: 2008 (-40.3%) and 2018 (-8.2% ). Despite this, the model dollar portfolio would allow an average to earn 5.2% per annum.
The average investor received much less: according to Dalbars, the yield of real portfolios on average amounted to 1.9% per year. Dalbars calculations relied on monthly shopping statistics and sales of investment funds by American private investors. Such a difference is explained, first of all, the fact that private investors were engaged in trading focused on obtaining short-term profit, which in the long run is an unprofitable strategy. However, this is a topic for a separate discussion.
What's nextShares prices broke away from reality. Now it is impossible to predict the profitability of investments for 6-12 months - the fundamental indicators of companies are little affected by the result of short-term investments. But they definitely indicate low average income on the horizon for 10 years. Model long-term forecasts of medium aggregate income from investments in stocks in international markets minus inflation from the Strategists of the analytical boutique Gavekal Research, GMO and others today give the expected yield of not more than 0-2% per year. And the higher the stock market takes off in the near future, the less investors will receive the next decade.
With bonds even worse. The real yield (taking into account inflation) of corporate bonds with the investment rating of two leading economies, the United States and Germany has become negative. In other words, investments in them reduce the purchasing power of capital.
In such a situation, the classic portfolio "60/40" can show a negative real cumulative income in the next 10 years. The legendary management company GMO predicts that the current decade will be "lost" for such a portfolio
The model compiled by the authoritative investor John Hussman, known for its academic approach to investments, is 60% of the shares, 30% of bonds and 10% Cash - gives a potential yield minus 1.7% per annum.
This unpleasant perspective is a consequence of the uniqueness of a new business cycle in stock markets. On the horizon for 2-3 years we will see three phenomena, which will be extremely negative in all classes of assets:
- Inflation growth.
- Interest rates.
- Completion of liquidity injections in stock markets by central banks.
Individual investors who are not ready to put up with the nearby profitability of classic portfolios in the coming years may have to turn to the experience of professionals. Many of them understand that bonds will show themselves worse than other class assets, and therefore reduce the share of bonds in briefcases in favor of alternative investments in financial assets.
One of the most respected institutional investors - the University of Yale University Endoument - for 20 years, from June 2000 to June 2020, received an average annual cumulative income of 9.9% in dollars. In the portfolio model of the Foundation at 2021, the greatest weight (64.5%) is accounted for by alternative tools, of which:
23.5% - Maximum Cumulative Revenue Strategies (Absolute Return Strategies). This is usually a basket of investment funds, including hedge funds aimed at obtaining a positive income in all conditions: with growth, fall or market stagnation. Usually, this basket has less volatility than a traditional stock portfolio, and a lower maximum cost drawing during the fall of the market;
23.5% - startups (Venture Capital, share in the portfolio);
17.5% - funds that finance mergers and absorption acquisitions with the use of shoulder (LEVERAGED BUYOUT, LBO).
Many other professional investors also expand the use of alternative investment tools. Now an interesting expected yield show products and funds that invest in trade finance funds are about 7% in perspective of 12 months. In the past few years, funds lending (Private Credit) are becoming increasingly popular - they are an alternative to bureaucratic banks, the regulation of which is tightened annually. The expected profitability is 5% for the coming year.
Such alternative investments are not for all: the entrance ticket is very expensive. For hedge funds, it begins with $ 1 million. But in venture investments in the early stages there are $ 10,000-500,000 investments. It all depends on the project. You can find Quality Funds Private Credit, which are taken to the Office of the amount from $ 100,000. In portfolios of wealthy private investors, the share of alternative investments today is an average of 10%, venture capital investments (startups) - about 5%.
In international stock markets, in my opinion, the most successful will be an active investment strategy, oriented on:
- high-tech companies with breakthrough technologies and rapid growth of profits (Growth Stocks);
- Companies with a sustainable business model and stable profit, which is reinvested in business development (compounders);
- Companies introducing innovative technologies that change the structure of individual industries and economics (disruptors).
But with all that investors, it is still recommended to comply with three important rules for successful investment:
- It does not matter how much money you earn, - the success of investment is to avoid large losses that can become catastrophic for your portfolio and your finance.
- It is important to avoid any investment products, money management programs, where you do not fully understand all the characteristics of the instrument. What exactly do you own? How do money make money on this instrument? What are the risks? What is liquidity? As well as many other professional factors that need to be taken into account when investment solutions.
- It is necessary to find your own comfortable level of risk. The amplitude of the oscillations of the Russian stock market, with the exception of bad years (2008, 2014, 2020), is approximately 30%, developed markets - about 10%. If you are not ready to take such an amplitude of oscillations, it means that the share of shares in the structure of your assets should not exceed 10%, and the share of conservative investments (deposits, real estate) must be maximum. If the investor takes the risk, which is above its comfortable level, then during the collaboration of the market, it usually takes incorrect solutions and often makes a fatal error - sells financial instruments when they need to be bought.
I wish all successful investments!
The author's opinion may not coincide with the position of the VTIMES edition.