Few of us can expect perfection from our portfolios. But with the advice of experts in offshore investing, perhaps we might draw closer to achieving our financial goals for the future.
Glance at an ideal investment world
Creating the right investment portfolio is more an art than a science. The right mix of assets depends on an assortment of factors, including your personal and financial circumstances, your goals, your tolerance for risk and market trends or conditions. But while one size can never fit all - it's hard enough to fit one - model portfolios created by financial professionals can help you deploy capital in a way that will provide greater returns with as little risk as possible.
The examples offered here should not be followed to the nth degree, at least not without consulting a planner. But one or more of them could serve as a rough outline - a jumping-off point - if you, like many investors, have your assets assembled into a loose hodgepodge rather than a cohesive, well-researched portfolio. Much about the process of creating a model portfolio is subjective. Some versions are exceedingly intricate, with many moving parts and compositions that are frequently tinkered with. Others have fewer holdings and more of an evergreen character.
One element that affects portfolio construction heavily is the passage of time. As investors get older, many planners say that holdings in comparatively low-risk assets like bonds must replace stocks, because the need for income increases and there is less time to make up losses. With that in mind, two sets of model portfolios are presented here. Each is aimed at an American or British citizen who is living in the Middle East and expects to return home in a few years.
The first is intended for twentysomethings who have so far managed to set nothing aside. The second portfolio is for their elders who have hit 50, have a sizeable chunk of money to invest and can afford to salt away even more each year. The first order of business when considering a good mix of assets for someone young and broke is to accumulate cash to cover unforeseen events, said Phillip Hasel, an international consultant at the London financial planning firm Punter Southall International. When it comes to covering the cost of the foreseen events of the rest of a British investor's life, he advises a heavy allocation - 30 per cent of a portfolio - to US and UK shares.
Mr Hasel would put 9 per cent in Asian stock markets outside Japan and 29 per cent in other international equities, including Continental Europe and emerging economies. The remainder would be kept in government and corporate bonds (10 per cent and 13 per cent, respectively) and cash (9 per cent). The older investor would hold the same repertoire of assets but in different proportions. He suggests 57 per cent in equities in high-growth markets, such as those in Asia; 27 per cent in bonds, mostly gilts; and the remaining 16 per cent in cash.
Mr Hasel encourages investors to guard against the prospect of inflation by placing a portion of the fixed-income assets in index-linked instruments. "Hedging against inflation is never a bad idea and in itself represents a low-risk strategy," he said. Mr Hasel's equity allocations do not diminish appreciably between the younger and older investor. The discrepancy is much greater in the portfolios put forward by Christopher Shaw, the group head of wealth planning at SG Hambros, a British private bank.
Mr Shaw would have a much heavier exposure to shares for a young British investor - as much as 95 per cent - divided among funds specialising in US and emerging markets, while avoiding Europe. The weighting in equities would fall to as little as 40 per cent for someone in middle age. The remaining portion, set aside for cash and bonds, would be skewed toward ultra-safe government issues, especially now because of the credit risks that remain in the economy, Mr Shaw said. The older investor "could not afford to lose most of his capital, as there is little chance of clawing it back over time," he noted.
One of the biggest issues for most investors would be a non-issue for British expats in the Middle East: taxes. That means there is little point wrapping investments in a pension plan, Mr Shaw said. It is important, however, to use offshore funds in order to ensure that capital gains and income will escape tax, he added. Peter McGahan, the managing director of Worldwide Financial Planning in Wadebridge, in southern England, also recommends using offshore vehicles, but he offers a different take on risk from some of his peers. Certain assets may be more or less risky than others, all things being equal, but after the severe ups and downs of recent months, all things are not equal, in his view.
Bonds are deemed less risky than stocks most of the time. It would be hard to consider them less risky now, however, because interest rates, which move in the opposite direction from prices, are very low and likely to rise for some time, he said. By contrast, he finds two types of assets that are generally considered riskier, shares of smaller companies and global real estate investment trusts, to be cheap and therefore on the safe side these days.
Mr McGahan has proposed an intricately detailed set of model portfolios. The younger investor would hold 16 equity funds, allocated 31 per cent to Britain; 15 per cent to the United States; 9 per cent to Japan; 23 per cent to Europe, including a 12 per cent allocation to Premier Pan European Property Share; and 22 per cent elsewhere, including emerging markets. Several of the funds he recommends focus on shares of smaller businesses, such as Schroder US Smaller Companies, Ballie Gifford Japanese Smaller Companies, Standard Life UK Smaller Companies and Threadneedle European Smaller Companies.
Mr McGahan employs an interesting tactic when constructing a portfolio for the older investor. The lump sum that he has accumulated already would be allocated to several of the same equity funds, plus a couple of fixed-income funds and others balanced between stocks and bonds, or which concentrate on equities that pay high income. In order to take advantage of fresh market trends, he would invest new money in segments of the market that he believes have the best near-term prospects. He would bet on a further recovery in bank shares through Jupiter Financial Opportunities, for instance, and take an extra helping of Premier Pan European Property and some of the smaller-company funds.
Elizabeth Ruch, a financial planner at the asset management firm Waddell & Reed in San Diego, has a philosophy much like Mr McGahan's. She believes that a young American investor "should be as aggressive as he can possibly be". Aggressive asset allocation and strong long-term returns go together, and youth allows time to compensate for the mistakes and adverse serendipitous developments that are bound to crop up. As Ms Ruch remarked, not putting too fine a point on it, "a young guy can take a lot of garbage coming down the tube".
The core of her portfolio for this young guy or gal would be a world allocation fund, one whose managers have a remit to invest in whatever they think offers the best opportunities - stocks or bonds of any sort and in any country. She would also make a healthy commitment to funds focusing on Asia and global natural resources. Other selections include smaller-company funds to capture "what's new on the horizon," she explained, and, for balance, a more plain-vanilla vehicle concentrating on blue chips paying high dividends.
Because the typical individual stands a good chance of living a good 25 years after retirement, Ms Ruch's model portfolio for the older investor would be "much more conservative but still growth orientated." She would maintain similar investments in the world allocation fund and in Asia and natural resources and go up to 20 per cent on blue chips. She would add exposure, maybe 5 per cent to 10 per cent each, to funds owning shares of medium-sized companies and bonds issued in developed countries outside the United States. To make room, she would lighten up on smaller companies.
She advises against holding individual shares, although a smallish allocation to the stock of the company you work for is in order. Expats might make a modest investment in their adopted country's markets, she added. Ms Ruch's recommendation to have a fund that can go anywhere is a way for investors to have their cake and eat it too. They can maintain a stable portfolio that doesn't flit about from fund to fund or stock to stock, while still being able, through the decisions of professional managers, to respond to ever changing market conditions.
Some investment advisers, mainly market strategists, have model portfolios that change every few months or even weeks. At the other extreme, certain planners try to cope with changing markets, as well as ageing clients, by creating fairly constant portfolios that feature as broad a diversification among asset classes as is feasible. It may be possible to create a model portfolio for older people that is simpler than many others, with a smaller number of holdings, yet that is also more extensive, covering a wider spectrum of the investment universe. One financial planner thinks that crafting one would be an especially worthy task now.
Stock markets are more volatile than in ordinary times, and miserly interest rates give bonds little hope of providing adequate income, said Louis Stanasolovich, president of Legend Financial Advisors in Pittsburgh, Pennsylvania. In such a treacherous climate, the typical portfolio, comprising only equities and fixed-income instruments, is inadequate, in his view. He proposes a portfolio for his American clientele that is far more diversified, yet consists solely of six mutual funds. They include several oddball choices that are neither fish nor fowl, investing in multiple types of assets. Collectively, the funds provide access to stocks and bonds, of course, and also real estate, commodities and such exotic fare as financial derivatives.
His favoured half dozen are: Leuthold Core Investment, a mix of stocks, bonds and cash seeking income and capital appreciation; First Eagle Global, which can hold US and other stocks, as well as debt instruments; Hussmann Strategic Growth, a safety-conscious capital-appreciation global stock fund; Caldwell and Orkin Market Opportunity, a stock fund that can sell short to bet on falling prices; Franklin Adjustable US Government Securities, a portfolio of mortgage securities that offers an oblique entrée into real estate, and Rydex/SGI Managed Futures Strategy, which furnishes access to alternative asset classes like commodities and financial derivatives.
The quality of the funds' managers, plus the anything-and-everything asset mix, has resulted in solid returns with minimal volatility, Mr Stanasolovich said. By his calculation, holding the six funds in equal weightings would have returned about 6.5 per cent a year since 2000, a period during which the Standard & Poor's 500-stock index has lost close to 3 per cent annually. He stressed that anyone adopting his portfolio cannot quite set it and forget it. Markets are constantly moving up and down relative to one another, so equal weightings do not remain that way for long. He advises investors to rebalance once a year, bringing the proportions back in line.
"That forces you to harvest your winners," he explained. Put another way, such a tactic should help to improve returns by instilling the discipline to buy cheaper laggards and sell pricier overachievers. Such rebalancing is important for anyone following a model portfolio, either one of these or one suggested by another planner. But professionals encourage investors not to overdo it by bringing holdings back in line too frequently or drastically.
Many portfolios are well out of whack after the wrenching ups and downs of the last year. Rather than engaging in wholesale buying and selling to return to the desired proportions, the task can be accomplished gradually by committing new savings into the underweight assets. Aside from rebalancing and making adjustments to account for the more glacial changes related to age, investors should resist the urge to be fussy and continually tinker with their portfolios. As Ms Ruch likes to say, "I believe in being a long-term thinker, not a short-term worrier."
Conrad de Aenlle, who is based in Los Angeles, has covered business and investment topics for nearly 20 years