Portfolio Management in Uncertain Times

Since the commencement of Covid 19 we have seen both share and property markets act in ways, that even the experts were unable to predict. Portfolio Management in uncertain times is a challenge for all.

We have all been told many times that “Past Performance is not a reliable prediction for future performance”. However, most people feel that given the current environment and based on what has happened in similar circumstances, an educated guess can be made. This is all both the do-it-yourself investor, and the experts must base their predictions on.

The advantage for the experts is that they have more resources to access and thus their predictions are generally more reliable. But there are always things, such as wars, catastrophes, and government intervention that can’t be predicted.

I have always thought the most reliable source for the prediction of future economic conditions is the Reserve Bank. In recent weeks, the RBA has been criticized for not predicting the rising Inflation Rates. In hindsight, the RBA has blamed the escalating Ukraine war and overseas factors which they cannot control. With Inflation rising above the target rate of 2% – 3%, they were left with no choice but to raise interest rates beyond their expectations.

Who at the start of Covid, would have predicted runaway real estate prices? In hindsight, it is easy to see that with the reduction of interest rates by government intervention, more people could afford to buy rather than rent. This was supported by people needing larger homes when they found they would be working from home during the Covid crisis and that many would continue to work part-time afterward because it was more efficient.

The result of rising interest rates this year has resulted in a fall in property prices from their stratospheric increases of recent times. Those who bought at the peak of the property boom when interest rates were at a historical low, may find they now have negative equity and an inability to pay the higher mortgage payments.

In these uncertain times, predicting the best investment portfolio mix will be difficult.

Check out our article 6 Key Benefits of Making a Financial Plan.

Theories of Portfolio Management

The Permanent Portfolio was developed by Harry Browne who was a free-market investment analyst in the 1980s. The portfolio is designed to perform well in all economic conditions but reduce losses in downturns. The portfolio equalizes balances between prosperity, recession, inflation and deflation.

According to Investopedia, this portfolio performs well in the long term, but not as well as a 60/40 split between stocks and bonds. However, the advantage is that it reduces losses in market downturns.

The asset allocation is 25% each in the following four asset types:

Bonds
Stocks
Gold
Cash

The Golden Butterfly Portfolio was developed by Tyler, the author of Portfolio Charts. While the portfolio is like the Permanent Portfolio, it adds an additional category of Small Cap Value Stocks. This addition tilts the portfolio towards prosperity. The consensus is that this is a reliable risk-adjusted portfolio suitable for both accumulators and retirees.

The asset allocation is 20% each in the following five asset types:

Bonds
Small Cap Value Stocks
Large Cap Stocks
Gold
Cash

Ray Dalio’s All Weather Portfolio is designed to perform in all market conditions such as inflation, deflation, and economic growth or decline. Ray Dalio is an investor billionaire and founder of one of the world’s largest hedge funds, Bridgewater Associates.

In recent times, Ray Dalio has published two books:

Principals: Your Guide Journal (Publication Date 22 November 2022)
Principles of Dealing with the Changing World Order: Why Nations Succeed or Fair (2021)

I believe both these YouTube videos will give you a short explanation of his books.

Changing World Order by Ray Dalio (44 mins)
New Money Review of Dalio’s theory: The Changing World Order in 2022 (13 mins)

The All Weather Portfolio has a different set of asset allocations:

Bonds (40%)
Stocks (30%)
Gold (7.5%)
Commodities (7.5%)
Cash 15%

Expert Advice

If you have a Financial Adviser, they will most likely subscribe to newsletters that will keep them abreast of likely economic changes. This may be the time for you to have a discussion with your adviser about how your Portfolio is protected against any unforeseen circumstances in these uncertain times.

If you prefer to control your Investment Portfolio independently, the theories of Portfolio Management may give you some guidance.

If you manage your Share Portfolio, a subscription to Lincoln Indicators could be worthwhile. Lincoln Indicators provides extensive information about specific shares and classifies them into different recommendations. They also have a very good charting package. The charts for the various indices may give you an indication of where those indexes are heading – up or down.

Real Estate is usually considered a long-term investment, so investors are unlikely to be flipping in and out of the market. If you are in a situation where you think you are either overweight or underweight in real estate, exploring the current trends in your location may be a good place to stay. Coredata is likely to have the most comprehensive data, but access is usually expensive and restricted to professionals. If you have a friendly real estate agent, they may share some information about recent changes in real estate prices and future expectations. RealEstate.COM also publishes research, some of which are free.

Financial Mappers and Portfolio Management

Financial Planning Software for Asset Management

Financial Mappers has an extensive set of tools that allow you to review your Asset Allocation for Portfolio Management. You will be able to change the asset allocation over different time periods in your plan.

These allocations can be displayed in both data and graph view for the total portfolio or separated into asset allocations for Retirement Funds and Personal Investments. There are two ways in which the portfolios can be described.

The first is an Asset Allocation that divides the portfolio into 20% allocations of Cash and Fixed Interest Securities. They are described as these broad categories:

No Growth (100% Cash)
Low Growth
Conservative
Balanced
High Growth
Aggressive

They can also be described as Defensive Assets which consist of Cash and Fixed Interest Securities and Growth Assets. Growth Assets can rise and fall in value, whereas Defensive Assets, do not change in value provided, they are held to the maturity date.

Financial Mappers will also describe assets according to the Percentage of Growth Assets. Growth Assets are usually property, shares, and managed funds that include shares or property.