[ASSET ALLOCATION] HOW TO MAKE DIVERSIFIED INVESTMENTS THROUGH ASSET ALLOCATION
The world stage has recently changed, so it's hard to paint it with ink. The Middle East conflict is winding down, and the humanitarian crisis in the Horn of Africa is deep. The revival of the Latin American left meets the right wing's tenacity, the Asian transition is economically secure, and the war in Russia is difficult to solve. Global trade winds blow, inflation is high, and supply chain problems remain to be solved.
With more and more volatility for investors, how to pursue portfolio security is a question that needs to be addressed in the long term, so this article will do some research on asset allocation.
First, global asset allocation is essential
From our own personal point of view, our own individual wealth is like a leaf, a single bet on an asset in one area can be more risky, and as seen from the history of imperial decline and the transformation of the trading network, recent history has witnessed the rise and fall of multiple empires such as Spain, the Netherlands, the United Kingdom and later The United States, their position in the global trading system has changed significantly.
Spain was once a prosperous empire through the mining of gold and silver in the new continent, but its economic strength was gradually replaced by the Netherlands, which became the “chariot of the sea” with its powerful maritime transport capabilities and financial innovation.
Britain, in turn, built a vast empire through the Industrial Revolution and global colonial expansion, becoming the “Empire Without Sunset”.
The United States grew to be the global economic dominator in the late 19th to early 20th centuries.
These changes mean that global wealth and economic growth momentum are shifted between countries and regions. If investors can adjust their asset allocation in time to follow the changes in economic gravity, they can capture emerging growth points, avoiding over-reliance on a single country or region, otherwise the decline of a single region from a longer perspective It seems that there will be a more serious negative impact on individual wealth.
So from a global investment perspective, what asset allocations can we borrow from ETFs?
Second, grow and secure: invest in S&P 500 index and high-dividend ETFs
As Buffett has repeatedly stressed, “I think the best way for most people is to have a S&P 500 index fund.” The S&P 500 has excelled in the countless upheavals and transformations of the past, and according to statistics, the S&P 500 has been profitable every 20 years in its history. It has a 20-year average minimum return of 5.62%, a 25-year average return of 9.07%, and the actual rate of return is closer to the average as investment time extends. There were a total of 1152 months from January 1928 to December 2023, with a positive return in 682 months.
Investing in the S&P 500, with asset allocation, helps investors to avoid the risks of the market to a great extent. This passive investment is perfect for the average person, saving not only time researching stocks, but also helping investors continue to make profits. Well-known S&P 500 ETFs on the US market include:
$SPDR S&P 500 Index ETF (SPY.US) $
It is one of the first and most well-known S&P 500 index ETFs on the market. Managed by State Street Global Advisors, launched in 1993, it is not only one of the largest exchange-traded funds in the world, but has been a widely used US large-cap investment vehicle by investors. SPY has extremely high liquidity, huge daily trading volume, which makes it easy for investors to buy or sell, and the spread is often small, which is especially beneficial for big hand traders.
$ S&P 500ETF-iShares (IVV.US) $
IVV is an ETF issued by iShares under BlackRock and also aims to track the performance of the S&P 500 index. IVV has a lower cost ratio compared to SPY, at around 0.03%. WHILE IVV'S LIQUIDITY IS NOT AS HIGH AS SPY'S, FOR MOST INVESTORS, ITS DAILY TRADING VOLUME IS STILL SUFFICIENT TO MEET NORMAL TRADING NEEDS.
In addition to investing in the S&P 500ETF, a high dividend strategy is also the best asset allocation strategy for stable returns in a volatile macro environment, especially against a backdrop of high interest rates. IF YOU WANT TO PURSUE HIGHER DIVIDEND RETURNS, YOU CAN ALSO LOOK OUT FOR THE FOLLOWING ETFS:
$Schwab US Dividend Equity ETF(SCHD.US)$
The ETF tracks the Dow Jones Dividend 100 Index, which consists of companies that have paid dividends for at least 10 consecutive years and are rated highly for dividend quality based on factors such as earnings growth and return on equity. This means that SCHD invests in some of the highest-earning and most stable dividend payers on the market, such as Getaway, Johnson, and Microsoft. With a dividend yield of 3.52% and $536.5 billion in assets, this ETF is a great choice for investors seeking steady and growing dividend income.
$JPMorgan Equity Premium Income ETF(JEPI.US)$
This is a Covered Call ETF issued by JPMorgan Chase. Unlike traditional ETFs, the Covered Call ETF sells bullish options on the same asset to earn option fees in addition to holding a basket of stocks corresponding to its tracking index. This investment approach is suitable for some assets that maintain a steady growth frequency, i.e. in addition to the gains from holding stocks in ETFs, holders can receive option fees.
JEPI tracks companies in the S&P 500, while offering investors incremental fees by selling bullish options, aiming to provide distributable income and stock market exposure with less volatility on a monthly basis. According to data from JPMorgan Chase, this ETF:
Offers a highly attractive 12-month rolling dividend yield of 8.50% and a 30-day total return of 7.04%;
yield in the top third of products in the same category;
Compared to peers, the price is competitive with a management rate of only 0.35%.
Third, excellent hedge asset allocation: invest in commodity hedge assets such as precious metals
As the saying goes, the world buys gold. As a traditional safe haven asset, gold is often sought after in financial market turbulence, currency devaluation, and rising inflation. Its non-credit nature makes it independent of the financial system and provides a way to hedge risks. In addition, gold has proven many times in history its ability to hold value in times of crisis.
And despite the current economic situation in the world, geopolitical tensions and global central banks have been catalysts for a surge in gold prices since the beginning of the year.
ETFs give investors the opportunity to participate in the gold market without having to directly hold gold. Gold ETFs, with their high transparency, high liquidity and ease of operation, have gradually become an important tool for investors to allocate gold assets. There are currently many more mature gold ETF products on the Hong Kong and US equity market, such as:
It is the largest gold ETF in the world and offers investors the opportunity to track the spot price of gold.
It is a gold ETF listed on the Hong Kong Stock Exchange and is a sister fund to GLD, which tracks gold prices.
At the same time, commodities such as crude oil are also worthy of attention. Energy prices may rise due to supply disruptions, increased transport risks or expected changes in demand due to geopolitical tensions, such as worsening of the recent Middle East conflict that could trigger a rise in crude oil prices. As an important component of commodity categories, there are also some crude oil ETF products on the market:
$ US Crude Oil Fund ETF (USO.US) $
Known as the United States Oil Fund, it is an ETF that tracks the price of WTI crude oil. The ETF tracks the volatility of the price of WTI crude oil by investing in crude oil futures contracts. The advantage of the USO is that it allows investors to invest in the crude oil market at a relatively low cost without the need to buy crude oil directly. In addition, USO is an ETF with good liquidity and easy to trade. However, the USO exists due to the downside of rolling costs, market risks, etc., caused by rolling futures contracts.
$Proshares Doubles Vacant Bloomberg Crude ETF (SCO.US) $
The ETF, also known as ProShares UltraShort Bloomberg Crude Oil, is an ETF for short term crude oil that aims to provide a reverse investment in the price of WTI crude oil. The ETF achieves its goals by investing in oil price futures and other derivatives. SCO's advantage is that it can provide protection against falling oil prices, which makes it an investment tool in oil market downturns. However, SCO also has high risks associated with short-term trading and speculation.
The above two crude oil ETFs correspond to positive and reverse investments in crude oil prices, and one can choose cautiously after judging price movements based on the economic political landscape and market expectations.
Fourth, stable happiness: allocating fixed income assets such as investment bonds
At such a time node in 2024, the market is facing turbulence caused by factors such as economic recession expectations, geopolitical conflicts, increased financial system risks, and increased allocation of high-quality sovereign bonds such as sovereign bonds of highly rated countries for investors who value the safety and liquidity of assets. Placemats are also a good option. The Fed is now expected to keep interest rates high for longer or beyond market expectations, in which case high-yield assets such as government bonds become targets for investors.
U.S. Treasuries are considered the safest bonds in the world because the United States is the world's largest economy, and U.S. Treasuries are generally regarded as “absolutely non-defaulting” bonds unless the U.S. states default. US Treasury bonds can be divided into short-term bonds (1~3 years), medium-term bonds (4~10 years), long-term bonds (over 10 years). The more sensitive the longer-term bond is to changes in interest rates, the higher the yield in theory; the lower the yield on shorter-dated bonds.
As a result, investing in USD ETFs can not only get a stable, near risk-free dividend yield, but also a higher yield when rates go down.
Here are three time-limited U.S. Treasury ETFs that are recommended for beginners to start with:
$iShares 1-3 Year Treasury Bond ETF(SHY.US)$
$iShares 3-7 Year Treasury Bond ETF(IEI.US)$
$iShares 20+ Year Treasury Bond ETF(TLT.US)$
TLT has been the most popular US equity ETF for 23 years, with a large number of investors investing in US Treasury bonds through this ETF product.
While there are no signs of a reversal of the current inflation delay, there is also a special class of related ETFs on the US stock market for everyone to choose to invest in to reduce losses caused by inflation — Inflation Protection Bonds, also known as TIPS, are a special type of US Treasury bond whose capital and interest rate fluctuate with the inflation rate And adjust.
The principal value of TIPS adjusts according to the inflation rate and its principal value varies according to the Consumer Price Index (a standard measure of inflation). This means that if inflation rises, the bond's principal value will also rise, and vice versa. In addition, the interest rate of the bond will also adjust according to changes in the inflation rate. In this way, investors can ensure that the value of their investment is not affected by inflation.
The yields on TIPS are often lower than those of ordinary bonds because they offer additional protection. However, if inflation rises, the yield on TIPS will rise with it, which means that investors can get a higher return. We recommend one of the best performing TIPS ETF products below:
$Ishares 0-5 Year Tips Bond Etf(STIP.US)$
STIP is designed to track the Bloomberg US Treasury Inflation Guaranteed Securities (TIPS) 0-5 Year Index, which consists of TIPS with less than five years remaining for the remainder of the year. THE ETF PROVIDES INVESTORS WITH RISK EXPOSURE FOR SHORT-TERM TIPS. The shorter maturity of these securities means lower risks for investors, but also means lower returns compared to longer-dated securities. The Fund allocates approximately 38.0% of its total assets to TIPS for the remaining years between 3-5 years. The next largest investment ratio is approximately 22.5% and is directed to TIPS for the remaining years between 2-3 years.
5. Alternative investments such as hedge currencies, etc.
“Hedging currency”, as the name implies, achieves the effect of avoiding market risks by holding sovereign national currencies with optimal liquidity. When markets panic, these currencies are often seen as havens due to the stability of their national economies, strong financial systems, and their importance in international trade. And the most stable and reassuring currency is the US dollar. THE DOLLAR'S HEDGE ATTRIBUTES STEM FROM ITS DEEP UNDERLYING SUPPORT, INCLUDING BUT NOT LIMITED TO STRONG U.S. ECONOMIC STRENGTH, A SOUND FINANCIAL MARKET SYSTEM, HIGHLY LIQUID BOND MARKETS, AND ITS CORE PRICING POSITION IN GLOBAL COMMODITIES TRADING. Especially in times of declining market risk appetite and increasing uncertainty, the dollar has shown outstanding attractiveness in attracting global capital inflows, highlighting its key role as a haven asset.
Here's a look at one USD-linked ETF product:
$Powershares Exchange Traded Fd Tst Db Us Dollar Index Bullish Fund Etf(UUP.US)$
The ETF is designed to track and deliver gains in the performance of the US dollar index, primarily through futures contracts and other derivatives to enable investments in the value of a basket of major international currencies relative to the US dollar. The dollar index is measured by the combined value of the US dollar against the currencies of several major trading partner countries around the world. It usually includes currencies such as Euros, Yen, British Pounds, Canadian Dollars, Swedish Kronor, and Swiss Francs. As a financial instrument, the UUP allows investors to indirectly participate in investments in the movements of these currencies relative to the US dollar, without directly trading the forex market. Since it was originally designed to reflect the strength of the dollar, the value of the UUP should theoretically rise when the dollar rises relative to other currencies; conversely, if the dollar depreciates, the value of the UUP may fall.
IN THE FACE OF FUTURE UNCERTAINTY AND MARKET VOLATILITY, THE CORE VALUE OF DIVERSIFIED INVESTMENT LIES IN ITS LONG-TERM STABILITY AND RESILIENCE. It requires investors to have patience and vision, not to be swayed around in the short term, but to stick to investment principles, to continuously improve and balance their portfolios.
In today's globalized and digitalized world, each of our investors should take stock of the times and build a solid investment moat for ourselves with diversified strategies for asset allocation. Although it is impossible to predict every upswing in the market, by scientifically rationally diversifying our investments and making use of a variety of investment tools, we can steer well in volatile situations and even expect to reap solid and sustainable investment returns after a wind wave.
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