The three largest economies in the world are the United States, China and Japan. The United States and Japan have benefited from a protracted period of easy money but this is coming to an end. The Federal Reserve Board has already started raising rates in the U.S. and word on the streets in Tokyo is the Bank of Japan may follow suit next year. Interest rates affect businesses and consumers in several ways, and have direct impacts on stock markets, bonds and currencies. All of these markets are interconnected and the ripple effects of the rate hikes that are starting in the U.S. are creating volatility, particularly in currency and stock markets.
Investors generally dislike volatility, but it is a normal, healthy part of financial markets. The advisors at West Capital Group have been working closely with clients to help them understand what is happening, and to ensure that their portfolios are properly aligned to benefit from the current shifting markets. Calm, informed investors make rational decisions rather than falling prey to a supposed high-yielding scam or panic selling. Clients who have solid long term investment plans and well diversified portfolios can take advantage of market volatility to rebalance their portfolios and review their investment objectives. There are a few actions that will benefit most investors, to maximize their returns and minimize volatility.
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Gold and Precious metals
The price of gold correlates more with the inflation rate than interest rates, and it is increasing inflation that is driving the interest rate hikes. Properly diversified long term portfolios should contain at least a small holding in gold or precious metals, and investors can use downticks to strengthen their positions as appropriate. Gold is the widest held metal for investment purposes, followed by silver and platinum.
There are many different ways for investors to take a precious metals position. They can buy bullion, which is the metal itself, but this comes along with the burden of safekeeping, which most people can’t be bothered with. The most common way to invest in precious metals is through a mutual fund or direct equity investment. Stick to large cap blue chip mining companies; the juniors have too much capital risk for most investors and are full of scams. Goldcorp, Barrick Gold and Newmont Mining are the three largest gold companies, according to Wikipedia.
Exchange traded funds (ETFs) can also be a great investment. Compared to mutual funds they are more liquid and have lower expense ratios, while providing the benefits of professional management and diversification. There are many well run ETFs and those on the Nikkei in Tokyo tend to be priced better, adding more value for international investors.
Laddering Bonds
Bond laddering provides better returns, reduces interest rate risk and simplifies decision making for investors. It is the best fixed income strategy for conservative long term portfolios. Bond ladders are very simple. The fixed income part of a portfolio is divided in equal parts, five for example, and invested in staggered maturities. When the earliest one comes due, it is reinvested at the longest maturity.
This accomplishes two important objectives. First, one reduces interest rate risk and eliminates having to guess where rates are headed, simplifying decision making. Second, it increases returns, since most of the time rates are higher for bonds maturing further into the future. Investors can earn higher returns without exposing themselves to unnecessary credit risk by having to invest in poorer quality investments to earn additional return. Younger, growth oriented clients are usually heavier weighted in equities but all portfolios of any reasonable size should include at least a small portion of fixed income for capital preservation and diversification.
Shift Portfolio Weights
After developing an investment plan with an investment advisor, assets are purchased and long term investors should not actively trade stocks. Over time, different sectors of markets rise and fall at different rates and the percentage weights within a portfolio will change. Investors should periodically review their investment objectives, investment plan and holdings and take profits from overweight holdings. Volatile markets are a great time to do so. Selling stocks to reduce sector weight will generate cash that needs to be invested, and the periodic dips provide buying opportunities.
Cash can be reinvested in precious metals, as earlier discussed, if this is not already included in a portfolio. Certain sectors perform better during periods of rising rates, like big banks and large cap tech companies that produce hardware. Goldman Sachs and J.P. Morgan Chase are two publically traded banks, as an example. Apple and Microsoft are two technology companies that should weather any major storms for the near term. Social media giants are due for a rough ride this year, and mutual funds and other institutional investments that need to allocate funds to the tech sector will be moving away from Facebook, Twitter and Snap and looking for other places to park funds, generating buying for blue chip tech companies.
Final Note
Markets will always fluctuate and it is difficult even for the professionals to make exact predictions. But a well-diversified portfolio invested in good quality stocks and bonds will generate the best returns over the long term. Specific stocks mentioned in this article are to illustrate and explain concepts and should not be construed as buy recommendations. Investors should consult their financial advisor before making any major changes in their holdings.
About West Capital Group
West Capital Group is a privately owned wealth management company managing assets for clients from all around the world. Investors interested in superior returns and efficient, friendly and professional service is welcome to contact our office in Tokyo, Japan and we will answer all of your questions
