Where Should I Invest?

TLDR:

As we sail through this neverending mid-cycle, we get a lot of questions about where to invest next. Here’s the first of a 3-part series to help you think through your investing choices.

Asset allocation pieces have a grand and long-standing tradition in big banks.

They pop up at the beginning of each quarter and remind us about the most important investment decision we must make: portfolio allocation.

Mid-august is an unusual time to offer a piece like this, but we received an unusual amount of questions about where to invest now. That’s the ‘batman sign’ that tells us we must dust off the good ole asset allocation handbook.

So here’s 6 profiles of portfolio allocation – each one with its own merits:

Cash is king: 100% in cash. T-Bills give you 5.4% yield. With inflation falling fast, that’s not a bad place to be.

Treasury Bug: 100% in 10Y Treasuries. The end of the hiking cycle is in sight AND it’s entirely possible we see rate cuts next year. Long bonds do well in this scenario, and give you 4% carry in the meantime. Treasury bugs will hold on to their USTs until they can buy the market at a much cheaper P/E.

Risk Parity: [60% in Treasuries] + [40% in your favourite stocks]. Risk Parity’s century-old track record is stellar, and long-term investors do well to trust it with their savings. In terms of what stocks to add, we’ll discuss it tomorrow but the whole market is your menu, from strong momentum in tech to deep value in other sectors.

To the Moon: [30% cash] + [70% of your favourite stocks]. Who said the bull market is over? Cassandras have been complaining about expensive stocks for months and yet here we are at SPX 4,500. Just keep some cash to buy the dips.

Going Nova: [80% in your favourite stocks] + [20% in crypto]. The way to long-term returns is long-term risk-taking. “No pain, no gain”, that’s the philosophy. You got to keep the pedal to the metal all.the.time. if you want oversized returns.

The ‘Warren Buffet’: 200% in your low beta stocks. Buffet is not a value investor, he’s a low beta investor. He buys low-vol stocks on leverage, trusting the best US companies not to go bust. Worked well for him for a long time.

See anything you like? More to come tomorrow in terms of what building blocks you can use to make your own portfolio.

What’s happening in the markets?

This section is powered by Open AI connected to TOGGLE AI

On Tuesday, Wall Street experienced a decline as credit rating agency Moody’s rekindled concerns about the well-being of the US banking industry through its downgrade of multiple lenders.

Among these, 10 smaller to mid-sized lenders faced a one-notch reduction in their ratings, while 6 major banking entities, including BNY Mellon, US Bancorp, State Street, and Truist Financial, were placed under review for potential downgrades.

Moody’s cautioned that banks might encounter greater difficulty in generating profits amidst rising interest rates, increasing funding costs, and the looming possibility of a recession. The agency also expressed apprehension over certain lenders’ exposure to the commercial real estate sector.

Consequently, this development led to a decline of over 1% in the S&P 500 Bank index. Despite this, the second-quarter earnings revealed that banks could weather subdued revenues and still witness enhancements in capital ratios and tangible book values.

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Earnings Update: Alibaba reports tomorrow

Alibaba’s recovery may have been cut short by regulations but its recent corporate restructuring is a good move towards a better future. Click here to observe how the stock could perform after earnings.

Discover how other companies could react post earnings with the help of TOGGLE’s WhatIF Earnings tool.

Asset Spotlight: Hilton at a recent high

TOGGLE analyzed 5 similar occasions in the past where Hilton stock was at a recent high and historically this led to a median decrease in stock’s price over the following 3M. Read full insight!

General Interest: How to live an asymmetric life

Cool piece by Graham Weaver (the guy from Alpine).

He’s a lecturer at Stanford’s b-school and he wrote this very interesting article for his last lecture of 2023, where he applies some investing principles to the broader field of “how to live your life”.

The result is an excellent piece about how to write your own story. Read it here on Graham’s own site.

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Originally Posted August 10, 2023 – Where should I invest?