I often tell clients that there are 6 basic asset classes that we can invest in on their behalf: Stocks, Bonds, Cash, Currencies, Commodities and Real Estate.
Stocks and bonds being the two asset classes that Financial Advisors all around the country, if not world, specialize in. Whether they hire a third-party manager, buy a mutual fund, or purchase the securities directly, (ownership stocks and “loanership” bonds) are the asset classes of choice.
My experience with the currency market is somewhat tunneled. In a former life (back in Australia), I followed the trends and direction of the Australian Dollar versus the U.S. Dollar, as my clients at the time were Australian businesses earning U.S. Dollars. A small move in the dollar could mean a dramatic difference in how many Australian dollars were received, a greater impact than what a well-executed growth strategy could deliver.
The commodities market is a large, hugely important market, with over 50 different commodity markets and around 100 indexes that can be accessed. Classified as “hard” assets, that are mined like gold, silver, oil etc., to “soft” assets generally classified as agricultural assets, such as wheat, coffee and sugar etc.
Real Estate, I don’t need to spend much time on, as you all grasp the concept. Some argue that your personal home is not an investment, I always account the primary home on the personal balance statement, as it is an asset that can be used to fund retirement or a means to access capital. The real estate bubble of 2007, inflated by easy lending, blind appraisals, changed this market a few different ways. It was devastating to some who over extended and created opportunity for others. Warren Buffett wrote in his 2010 letter to shareholders, that he predicted that the housing market slump would end sometime in 2011, and he subsequently expanded his Berkshire Hathaway Home Services company, buying distressed properties and later acquiring competitors to be a dominant player in the residential real estate market. Aside from residential investors have the chance to participate in owning commercial, multi family, storage, or high rise and lodging.
All three of the above asset classes are available to investors today through Exchanged Traded Funds or ETFs. I would guess today that there are over 1000 ETFs available.
Yes, Cash. This asset class so long been forgotten due to extremely low rates is the reason for today’s article. Due to the Fed raising rates in the 2018, cash has busted through a metric that has not been widely reported, which I can only guess is because no one wants to talk about the asset class that’s been the outcast for so many years. Firstly, last year, cash was the best performing sector.
Source: JP Morgan
Source: Barclays , Bloomberg, FactSet, MSCI, NAREIT, Russell, Standar d & Poor’s, J.P. Morgan Asset Management.
Large cap: S&P 500, Small cap: Russell 2000, EM Equity : MSCI EME, DM Equity : MSCI EAFE, Comdty : Bloomberg Commodity Index, High Y i eld:Bloomberg Barclays Global HY Index, Fixed Income: Bloomberg Barclay s US Aggregate , REITs: NAREIT Equity REIT Index, Cash: Bloomberg Barclays 1-3m Treasury. The “Asset Allocation” portfolio assumes the follow i ng w e ight s: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EME, 25% in the Bloomberg Barclays U.S. Aggregate, 5% in the Bloomberg Barclays 1-3m Treasury, 5% in the Bloomberg Barclays Global High Yield Index, 5% in the Bloomberg Commodity Index and 5% in the NAREIT Equity REIT Index. Balanced portfolio assumes annual rebalancing. Annualized (Ann.) return and volatility (Vol.) represents period of 12/31/ 0 3 –12/31/ 1 8 . Please see disclosure page at end for index definitions. All data represents total return for stated period. Past performance is not indicative of future ret urns. Guide to the Markets –U .S. Data are as of December 31, 2018.
Second, the yield on cash now is higher that the dividend yield of the S&P 500. Dividends for so many investors are what they rely on to fund retirement income (a point mind you that I don’t agree with, preferring to focus on total). However, it is an important factor for many. For clarification, when I say yield on cash, that is generally quoted as the 30-Day T Bill. We have recently purchased money market funds for a few accounts, and I had to make a call to re-learn how to do it. I seriously haven’t bought one for over 8 years, and it’s my first time doing so through the Raymond James system.
Parking cash and picking up a couple of percentage points while we determine the longer-term strategy sounds like a prudent plan to me for clients that have cash reserves. As you’ll see from the yield curve below, there is an inversion between the 1-5-year duration for U.S. Treasury securities. For CD investors who usually go out for a year or two, this may have you giving a double take.
My plan for this week’s article was to talk about the asset classes and introduce the “Hybrid” products. Hybrid meaning, they can be a combination of some of the asset classes above namely Convertible securities and preferreds, but for your sanity and mine, I think we might push back that topic to next week
That said, here’s the buy sell.
Any opinions are those of Mick Graham and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Investors should carefully consider the investment objectives, risks, charges and expenses of investment company products before investing. The prospectus and summary prospectus contains this and other information about mutual funds. The prospectus and summary prospectus is available from your financial advisor and should be read carefully before investing.
All indexes mentioned are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.
Alternative Investments involve substantial risks that may be greater than those associated with traditional investments and may be offered only to clients who meet specific suitability requirements, including minimum net worth tests. These risks include but are not limited to: limited or no liquidity, tax considerations, incentive fee structures, speculative investment strategies, and different regulatory and reporting requirements. There is no assurance that any investment will meet its investment objectives or that substantial losses will be avoided.
Real estate investments can be subject to different and greater risks than more diversified investments. A lack of liquidity, declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments.