Note: The following strategies guide our advice to clients and are reflected in the fund allocations for the Founders Fund.
The equity markets have experienced increased volatility over the last six weeks. Investors are recognizing that they may have been overly optimistic about the growth prospects of many companies. Indeed, this has been a concern we have highlighted in our communication for some time and our funds have been cautiously positioned as a result.
As the equity markets continue to decline, however, our managers are starting to find pockets of opportunity. We’re advising clients sitting on large amounts of cash to consider adding to stocks at this time. Additionally, investors should start rebalancing if the equity weight in their portfolio has fallen below what their plan calls for.
We have added to stocks in the Founders Fund. Our equity weight has risen to 58% from 54%. We’re maintaining some cash to put to use if markets fall further.
On an absolute basis, the risk versus return trade-off in bonds remains unattractive. Real yields (the yield after accounting for inflation) on government bonds have risen this year but are still around zero.
Yields may remain at low levels, or fall again if the economy falters, but as long-term investors we're looking further out and assessing the likelihood that they will normalize over time (when bond yields go up, prices come down). Over the next five years, we expect bonds to return between 2-3% per year, which translates to a 10-15% cumulative return. These returns are likely to come with higher volatility than investors have been accustomed to.
We recommend keeping bond holdings below your long-term target and setting aside a cash reserve. The Founders Fund currently holds 29% in bonds and 13% in cash — 8% more than its long-term target.
When considering how much to invest in stocks, we focus on the opportunities our managers see and the attractiveness of stocks in general. Through the most recent decline, our managers have bought a few new companies and added to several existing positions.
Our best estimate for 5-year stock market returns is 6-8% per year (30-45% cumulative). For context, our estimate was 4-6% (20-35% cumulative) in early 2018. We recommend investors do not let their stock allocation fall too far below their target weight. To prevent the down market from hurting your long-term returns, you need to go up with as much or more exposure to stocks than you went down with.
If you would like an assessment of your portfolio or a second opinion, give us a call (1-888-888-3147). We provide advice and can help better align your investments to your personal situation.
Founders Fund Asset Mix: November 22, 2018