The following strategies guide our advice to clients and are reflected in the positioning of the Founders Fund.
Like we’ve done in the Founders Fund, we suggest investors stick close to their long-term target of stocks and bonds. This will require some rebalancing given the sharp rise in markets. Investors drawing from their portfolio, including those enrolled in the Steadyhand Retirement Withdrawal Program, should top up their spending reserve. We recommend investors have two years worth of expenses set aside in the reserve (please contact us if you’d like to learn more about the program).
Markets were in a buoyant mood in 2024 with a less dramatic economic slowdown than people expected and central banks initiating interest rate cuts. Like in 2023, a few mega-cap U.S. stocks dominated in 2024.
Equity markets, specifically U.S. mega-cap stocks, are currently at elevated levels. We believe some caution is necessary. Fortunately, Steadyhand investors have limited exposure to these areas as our managers focus on building diversified portfolios of profitable companies selling at reasonable prices. In the Founders Fund, we hold slightly less in equities than our long-term target. We’re holding 34% in bonds, more than we have in past years and close to our target of 35%.
Bonds
The risk versus return trade-off for bonds is in line with long-term averages but returns are likely to come with higher volatility than investors have been accustomed to as yields react to changes in interest rate expectations and central bank activity. Over the next five years, we expect bonds to return between 3-5% per year, which translates to a 15-25% cumulative return.
Bonds remain an important tool for most clients. They can provide safety when stocks are volatile, and as such, are a diversifier for a balanced portfolio.
In the Founders Fund, we’re close to our target weight in bonds (34%). We continue to hold an above-target weighting in cash (7%), which provides some defence when interest rates are rising and gives the fund liquidity. Much of the cash is invested in short-term investments such as T-Bills which are currently yielding approximately 3.3%.
Stocks
Our outlook for 5-year stock market returns is 5-7% per year (or 25-40% cumulative), which is below long-term equity returns. This accounts for the elevated values the largest U.S. companies are currently trading at. Global markets have become increasingly concentrated in these stocks and any decline will impact global returns more than it has in past years.
The Founders Fund does not own the market. It owns a diversified mix of stocks that are profitable and trading at better valuations than many areas of the market. We have lowered our weight in stocks, but just slightly. The fund currently holds 59% compared to our 60% target. We have steadily rebalanced to keep the fund at its target as markets have risen and encourage investors to do the same.
Specific Advice
If you would like an assessment of your portfolio or help with developing an investment strategy, we encourage you to book a meeting with us. We provide clear-cut advice and can help better align your investments to your personal situation.
Founders Fund Asset Mix: January 8, 2025