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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.

Conversely if the economy is weak, shares will underperform but bonds will do better as interest rates fall.

What has been a unique feature of 2022 and 2023 is that equity markets have had significant price falls although have also recovered circa 50% of these falls with  bonds having also witnessed severe price falls (rising yields) as central banks have raised interest rates extremely sharply over the past 18 months to combat global inflation which reached 8-10% in the western world and is still stubbornly high at 4 – 6%. So it has been very unusual for both bonds and stock prices to fall together.

10-year US/UK Government bonds now yield circa 4.5 % and shorter dated bonds nearer 5%.

On the basis that both equities and bonds have fallen hard, I would see this as a buying opportunity believing that inflation has peaked and we move into a more normal inflation and interest rate environment in 2024 and beyond.

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 15 years (US/UK Govt Bonds 4.5-5.0% and Corporate Bond Yields in these countries 1/1.5% higher).

I would concentrate a large portion of my equity allocation into US stocks since the US economy continues to grow despite higher interest rates.

Within this US stock allocation, I would allocate a good proportion of funds to US Banking stocks with US interest rates looking to stay ‘higher for longer’, as banks make greater profits in a higher interest rate environment e.g. If interest rates are zero, then banks pay their customers zero per cent interest on funds but the banks also earn zero per cent for the use of those fund. If interest rates are 5%, banks may pay their clients only 3% on deposits but then lend that money out at 5% > greater profits.

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).

For the 50% bond allocation, I would buy high-grade US Corporate debt denominated in US Dollars e.g. solid companies like IBM, Microsoft, Johnson & Johnson earning circa 5.5%/6.0% in 10-year maturities. I would not buy weaker corporate credits which might struggle if the US economy does eventually slow.

I believe investing in USD assets is fine as the US dollar should stay strong with US interest rates remaining high .