My 2019 Financial Market Outlook – According to My Current Portfolio
“People ask me my forecast for the economy when they should be asking me what I have in my portfolio. Don’t make pronouncements on what could happen in the future if you’re immune from the consequences. In French, they use the same word for wallet and portfolio.”
–Nassim Nicholas Taleb
Over the next few days and weeks, you’ll see many year-in-review stories and predictions about what will happen in 2019.
I thought about doing something similar, but then I stumbled upon a better idea: instead of writing predictions that have no consequences, I’ll share my current portfolio.
After all, people reveal their preferences and beliefs through their actions.
Look at someone’s bank statements, brokerage accounts, and a time log of his/her activities each week, and you’ll get infinitely more information about the person than you would gain from surveys, conversations, job interviews, or Instagram.
This article does not directly relate to winning a job in the finance industry, but sometimes I like to write about other topics. And I suspect that sometimes you get bored reading about networking, interview questions, and exit opportunities.
So, here goes:
My Current Portfolio
First, I am not going to give dollar amounts because it’s a bit tacky and I don’t feel comfortable disclosing that information – so these will all be percentages of total investable assets.
Second, these figures are across a wide array of accounts (Vanguard, Fidelity, Wealthfront, etc.), and some are in tax-advantaged accounts such as SEP IRAs, while others are in taxable accounts.
This is important because tax-advantaged accounts make assets like corporate bonds, real estate loans, and even dividend stocks far more attractive.
Some accounts are completely automated (Wealthfront), while others are “passive” but with allocations I select (Vanguard), and still others are a mix of automated and manual (real estate).
Finally, this is not “investment advice.” I am not suggesting that you follow anything here – in fact, for reasons I’ll explain below, you probably shouldn’t follow anything here.
Here’s my current breakout:
- Cash & Savings: 40%
- U.S. Treasuries: 12%
- Real Estate – Senior Secured Loans: 12%
- Equities: 10%
- Angel Investments: 8%
- Municipal Bonds: 5%
- Real Estate – Equity in Individual Properties: 5%
- Miscellaneous (Risk Parity Fund): 3%
- Crypto (Bitcoin, Ethereum, Others): 2%
- “Investment Grade” Corporate Bonds: 2%
I have an extremely high allocation to Cash & Savings and Treasuries, and it’s there because I sold a lot of positions in the second half of 2018 and am sitting on funds right now.
You could view this portfolio as following the “barbell strategy,” where you invest mostly in safer, lower-yielding assets, and then put the rest in higher-risk, higher-potential-return assets.
However, my total percentage in “safer” assets (~60%) is probably too low to meet the traditional definition.
Unfortunately, I can’t change my allocation much at the moment because many higher-risk assets are also illiquid (real estate, angel investments, etc.).
If there’s an actual market crash and the S&P drops by, say, 30-50%, I would start increasing my Equities allocation to 30-40%.
Portfolio = Market View + Personal Circumstances
I mostly agree with Taleb’s quote at the top – ask someone what’s in their portfolio if you want to know what they think about the economy and the markets.
But I would add one point: your personal circumstances also factor in quite heavily.
As an extreme example, even if you’re very bullish, it would be crazy to invest 100% in high-growth stocks if you’re 70 years old, retired, and need to stay alive for another 10-20 years.
And if you have irregular income, or you just earned a huge windfall from selling your company, it would also be crazy to put everything into high-risk assets right away.
In general, I think people tend to place too much faith in the financial markets and overlook several factors:
- The timing of contributions and withdrawals makes a huge difference – this is why you can’t take those online “returns calculators” seriously. Does anyone actually put $1 million in an S&P index fund at age 30, never touch it for 30-40 years, and then withdraw all the funds?
- There is no way to know your “risk tolerance” until you start losing large amounts of money. A lot of people say they’re fine with losing 40-50%, but when it happens, they panic and immediately start selling. I still remember the markets in 2007-2009 when everyone thought the world was ending.
- Government policy (QE, QT, interest rates) now affects the markets more than ever, so future performance is likely to diverge significantly from historical performance.
I’m not saying that you shouldn’t invest, but I don’t think it’s a wise idea to rely 100% on an index fund to pay for your retirement.
My Current Market View
Over the last few months, everyone turned bearish as the S&P experienced a big sell-off and as stock markets in places like the U.K., Germany, and China fell by 10-20%+ for the year.
Nothing seemed to work, as ~90% of asset classes posted negative total returns for the year.
Many news stories have pointed to trade wars, political instability, doubts about global growth, and rising interest rates to explain the poor market performance and volatility in 2018.
I am also quite bearish, but for somewhat different reasons.
Put simply, the Federal Reserve and other central banks have massively distorted financial markets since the 2008-2009 crisis by injecting over $12 trillion of liquidity into the system with quantitative easing.
The Fed also dropped interest rates to ~0%, and banks in Europe and Japan followed, with some eventually setting negative rates.
These policies led to a big increase in stock markets worldwide, but barely affected the “real economy”; they also explain why the wealthy have become even wealthier over the past ~10 years and the middle class is on its deathbed.
Take a look at the charts, and you’ll see how much of a stretch it is to say that QE had any impact on GDP growth in the U.S., EU, U.K., or Japan.
I like this graph from the Federal Reserve Bank of St. Louis on the Fed’s Total Assets vs. the S&P 500:
Or, for even more fun, take a look at this one from Yardeni Research about the S&P 500 vs. the Total Assets of the Fed + ECB + BOJ:
Now that the Fed is enacting “quantitative tightening” by letting the bonds on its Balance Sheet mature, it’s only logical to expect market declines as it reverses its policy.
Yet the central bankers want us to believe that “everything will be OK” as they tighten monetary policy and reduce their Balance Sheets.
Well… sort of.
At least one central banker admitted the truth before ascending to his current position:
“Right now, we are buying the market, effectively, and private capital will begin to leave that activity and find something else to do. So when it is time for us to sell, or even to stop buying, the response could be quite strong; there is every reason to expect a strong response.”
-Jerome Powell, October 2012 FOMC Meeting
My Personal Circumstances
Beyond just my bearish views, I’ve also allocated very little to Equities for another simple reason: at this stage, I have more downside than upside from investing.
Put differently, if my net worth increased by 50%, my life would barely change. But if it fell by 50%, that would be a catastrophic loss.
Also, it’s highly unlikely that I will be earning the same level of income from this business far into the future.
I anticipate much lower income when I’m older, which means that I can’t take huge risks and then make up for next year’s giant loss 10 years from now.
It’s similar to a startup founder who ran his/her company for ~10 years, sold it, and earned a windfall from the sale: nicely done, but who knows if it will happen again.
My Current Portfolio
Now I’ll go through the different categories and explain my reasoning for each one:
Cash & Savings (40%)
I am parking cash here to earn 2-3% interest while I wait for the markets to drop further.
The 2-3% interest rates currently offered by high-yield savings accounts and CDs in the U.S. are not great, but a 2-3% yield is a whole lot better than losing ~6%, as the S&P 500 did in 2018.
And this yield at least lets me keep pace with inflation – unlike the rates offered several years ago before the Fed began hiking interest rates.
I am thinking of shifting some Cash into physical Gold or putting more into Treasuries or Municipal Bonds, but I don’t plan to make big changes until the end of the year.
U.S. Treasuries (12%)
I own a mix of short-term and long-term Treasuries, held in various low-fee funds.
The short-term ones are less sensitive to interest rates because of their short durations, while the long-term ones are much more sensitive.
I don’t own 100% short-term Treasuries because, contrary to expectations, I think there’s a decent chance that the Fed could slash interest rates if there’s a market crash or recession.
If that happens, 30-year Treasury prices should jump up, just as they did at the end of 2008.
I don’t plan to hold Treasuries long-term because I assume that QT and the massive deficits the U.S. is running will eventually make a very negative impact on prices.
Real Estate – Senior Secured Loans (12%)
Following the JOBS Act in 2012, dozens of real estate crowdfunding sites have sprung up.
I experimented with some of the more credible ones (Fundrise, PeerStreet, RealtyShares), but RealtyShares announced it was shutting down a few months ago, so maybe it wasn’t so credible.
So far, my debt investments have yielded about what I expected, with interest rates above those offered by savings accounts, CDs, and Treasuries, and no defaults.
I prefer senior real estate loans to P2P lending because the loans are all backed by collateral, and I can pick the types of loans more easily.
For example, I almost always avoid single-family owned homes because I don’t like the risks.
I like commercial real estate, especially multifamily and student housing properties, with occasional office/retail/industrial ones mixed in.
I don’t plan to increase my allocation here because I want to see how the loans perform over several years, especially if prices fall by 30%+ in the next recession.
These are a mix of growth and value-oriented stocks, divided between the U.S. and international markets.
I have these mostly because I experimented with Wealthfront, and it allocated a certain percentage automatically based on my “Risk Score.”
Most financial advisors would say that someone in my age range should have a much higher Equities allocation, such as 60% or 80%.
But there’s no way I’m willing to risk losing 30% or 40% of everything if global stock markets decline by 50%.
So, this one is “wait and see” until QT finishes, markets decline by 50%+, or something even worse happens.
Angel Investments (8%)
Back in 2014-2015, when the Fed finished QE3, I thought the markets were overvalued and that everything would come crashing down.
I was a few years early on that one, but as a result of this thinking, I started looking into alternative investments that weren’t as correlated with the stock market – such as early-stage tech startups via AngelList.
I’ve had a few exits, a few shutdowns, and a few cases where I doubled down on companies that were doing well.
This one is in the “too soon to say” category because it might take 5-10 years to see the full results of these deals, and there’s no liquidity until exit or shutdown.
I’m not planning to put much more into this category because 8% is more than enough for my highest-risk, least-liquid asset.
Also, individual investors are at a disadvantage in angel investing due to dilution in later funding rounds.
And I do not live in Silicon Valley and do not have special insight into most startups, so maybe I shouldn’t even be here in the first place.
Municipal Bonds (5%)
Wealthfront automatically allocated this one due to my relatively low Risk Score.
I might put more into this category and buy a muni bond fund; unlike Treasuries, they do have credit risk, but in my tax bracket, the favorable tax treatment makes a big difference.
Real Estate – Equity in Individual Properties (5%)
I like real estate as an asset class for many reasons, but a big one is psychological: I’m not tempted to check prices every 5 seconds and flip out when there’s a decline.
Prices of coastal real estate in the U.S. have been “elevated,” to say the least, so I’ve focused on multifamily and student housing properties and eREITs in less expensive regions like the Midwest and South.
This one is in the “too soon to say” category because some of these deals have multi-year holding periods.
I don’t plan to allocate much more here because I’m afraid that more of these crowdfunding sites will shut down or otherwise not survive.
Miscellaneous (Risk Parity Fund) (3%)
I probably should have disabled this setting in Wealthfront, but I’ll leave it for now and see if it improves this year at all.
Crypto (Bitcoin, Ethereum, Others) (2%)
I bought (some) Bitcoin for under $1,000 back in 2013, held on for years as the price fell, and then sold it for $15,000 – $20,000 in late 2017 and early 2018, earning almost 20x.
Then, I put a portion of the proceeds into altcoins and lost around 70%.
Thus, crypto has the distinction of delivering both my best returns and my worst returns of the past year.
I don’t plan to put more into this category because 2% is more than enough for something that is, essentially, pure speculation.
I think blockchain as technology is promising, but I have less confidence in cryptocurrencies as “assets.”
There’s a chance that Bitcoin could reach $100,000, and there’s an equally good chance that it could fall to $0.
“Investment Grade” Corporate Bonds (2%)
These are here because of a Vanguard fund that invests in conservative stocks and corporate bonds.
I have no interest in increasing my allocation here because I’m very bearish on corporate bonds.
The credit quality of most corporate bonds is overstated (see: the percentage of “covenant-lite” loans), and high corporate leverage is one of the biggest risks for the entire economy right now.
Up Next in This Series
Over the next few weeks, I’ll cover a few related topics and outlooks in different areas:
- The Bull Case and the Bear Case for the economy and markets as a whole.
- Which finance jobs look appealing going into 2019 (and beyond), and which ones you should avoid.
- And how recruiting might change in coming years.
And feel free to laugh at my ultra-bearish views, especially if the market is up 30% this year.
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