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 worlds ( 5.25% for US and UK) and indeed the US Federal Reserve made a 0.5% interest rate cut Sept 2024 and the markets expect a gradual reduction in interest rates around the world looking ahead to end 2024 and 2025.
This should be broadly supportive of both bonds and equities.
10-year US/UK Government bonds now yield circa 4.0 % and shorter dated bonds nearer 4.5%.
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 high interest rates now and for the last 2 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).
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 5.0%/5.50% 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 only slowly coming down. The biggest driver of a currency’s strengths is the level of interest rates compared to other countries.
Although gold is at an all time high of 2,600 Dollars per ounce I would have perhaps have 5% exposure here with global stability risks around Middle East, Ukraine, November US Elections and Trump 50:50 in polls.
