A common question especially in Asset Management interviews
In thinking on where to invest $1 million I first think about what a typical investor portfolio looks like considering the last 20, 30, 40 years and it is often 60% or 70% in equities and 40% or 30% bonds. The thinking being, that this portfolio is in balance i.e. if the (global) economy is strong equities will perform well, and bonds less well as interest rates may rise to control the speed of economic growth to stop the latter becoming inflationary as we have seen in last few years.
Conversely if the economy is weak, shares will underperform but bonds will do better as interest rates fall.
In 2022 this Classic (Balanced) Portfolio Theory did not work (-17% loss for the year) as inflation and interest rates rocketed) but generally this approach does work and is what I would recommend for interview.
It seems that interest rates have peaked around the world and have started to slowly ease as inflation seems to be relatively but not totally under control at around 3.5% in US/UK versus a 2% target.
Interest rate falls should be broadly supportive of both bonds and equities even if there is concern about the amount of bonds that need to be issued to fund (US/UK) budget deficits.
10-year US Government bonds now yield circa 4.2 % , UK 10-year bonds 4.80% annual rate of return or yield-to-maturity.
Whereas, I might invest 60% of my money in equities and 40% in bonds to express this view. I would actually invest 50% of my money in equities and 50% in bonds to take advantage of the highest bond yields for circa 20 years in 30-year maturity UK government bonds particularly (I would not buy US/UK Corporate bonds as the yield they offer over government bonds is at its lowest for over 10 years).
I would concentrate a large portion of my equity allocation into US stocks since the US economy continues to grow despite high interest rates now and for the last 3 years. My stock allocation would include decent exposure to US bank stocks as, although interest rates are coming down, that decent will take some time (18 months /2 years?) and banks make more profits in a high interest environment since they don’t pass all of those interest rate returns to customers who have deposits with them.
I like banks with a large customer deposit base like Bank of America with 33 million customers (US customer rankings JP Morgan/Bank of America/Citigroup/Wells Fargo). (Know the current stock price of each.) I would have some equity expose to technology stocks as AI is changing the world and some exposure is warranted.
I believe investing in USD assets is fine as the US dollar is at a circa 10-year low versus other currencies – weak because of a volatile Mr Trump and changing tariff policies.
Although gold is at an all time high of 3,700 Dollars per ounce I would have perhaps have 5% exposure here with global stability risks around Middle East, Ukraine and a volatile US President.
In today’s volatile world portfolio diversification is essential.
