Allocation Strategy During The Corporate Debt Hangover

Non Defense Cap Goods

So how might one invest in an environment where corporate and government debts have skyrocketed, asset prices have hit extremes and the Federal Reserve is committed to raising borrowing costs? Former PIMCO “guru” Mohamed El-Arian has finally decided that 25%-30% in cash is the best way to survive what he anticipates will be better buying opportunities down the pathway.

For my clients at Pacific Park Financial, Inc, we began making the tactical allocation shift in June of 2015 – seven months ago. We downshifted from 70% growth (e.g., large-cap, smaller-cap, foreign, etc.) to roughly 50% growth (high-quality, low volatility large-cap stocks). We moved from 30% income (e.g., short, long, investment grade, higher-yielding, etc.) to approximately 20%/25% investment grade income. With cash or cash equivalents approximating 25% – safer harbors such as SPDR Nuveen Short-Term Muni (SHM) as well as money market vehicles – we reduced volatility while awaiting better buying opportunities.

While I expect the corrective activity that began in May of 2015 to continue, my clients understand that I seek to reduce risk, not eliminate it. It follows that current stock exposure at 45%-50% does not represent a mindset of “shorting” or being out of equities completely. For the most part, we have been out of foreign positions and smaller U.S. companies for quite some time. Nevertheless, we maintain an allocation to equity ETFs via funds like iShares MSCI USA Quality Factor (QUAL) and iShares USA Minimum Volatility (USMV).

The bond story is remarkably similar. Rather than pursue cross-over corporates or high-yield or even long-term investment grade corporates, we have stayed near the middle of the curve with funds like: (1) SPDR Nuveen Muni (TFI), (2) Vanguard Total Bond (BND), (3) iShares 7-10 Year Treasury (IEF) and (4) iShares 3-7 Year Treasury (IEI).

There are those who crave a bit more potential than cash or T-bills. For those folks, rather than “shorting,” we employ multi-asset stock hedging. We’ve picked up some of the assets in the FTSE Multi-Asset Stock Hedge Index, including the yen, gold and zero-coupon treasuries.

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Disclosure: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered ...

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