The equity market has been making new high for the past few weeks, leading to speculation that we are about to witness one of the greatest bubble in the history of the stock market.
Using the S&P 500 as an example, the indices have returned 28.8% in the year of 2019, before continuing its massive upward presence to return 16.3% in 2020. The indices continue to make its recent high and are up by 16.5% year to date.
To illustrate just how lofty is the valuation of the market, we look at the famous Buffett Indicator, which measures the ratio of the overall US stocks market capitalization to GDP. The numerator indicates the price action and valuation expansion investors have placed on these stock prices versus the earnings that these corporates are generating to the economy.
As of the 8th July 2021, the Buffett indicator is flashing a strongly overvalued signal that is above +2 standard deviation – a record high which surpassed the days of the dotcom bubble as well as the Great Financial crisis. While the market can continue to go higher over the next few months, surely it pays off to put on an additional caution as a conservative investor.
Ray Dalio, a hedge fund manager who manages one of the biggest hedge funds in the world through Bridgewater Associates also mentioned last week the 6 conditions required to gauge the overall market level and compares it with past crises.
While there are obvious extension to market prices in relation to emerging tech plays in today’s eras, it hasn’t really spread out yet to the overall market which has seen some industries that are still lagging in terms of recoveries. Tech valuation however, depicts closer to the bubble territory and are getting crowded in recent months since the COVID days.
Using the Shiller CAPE PER as a gauge to market’s valuation, it is currently sitting in at 35x earnings which records second highest to the one we’ve seen almost two decades ago.
The current trailing US EV/EBITDA at 17.2x is also very high compared to the long term average mean of 10x and any investors who believe in the concept of reversion to the mean will want to take precaution to their existing position relative to the overall market valuation.
Rotational asset strategy implementation is an important determinant of our portfolio returns in the intermediate and longer term.
Simply put, the higher the equity market is right now, the lower will be our overall long-term return as reversion to the mean takes place. There is just no way we can sustain a high level of overvalued position for the entire operating duration without taking some hits in the face later on. At some point investors would have to face the brunt of larger market declines that could savage their portfolio.
One good portfolio diversifier which investors should consider is adding gold, which is seen as a haven to their portfolio.
You can do this by considering the Gold Spot (“XAUUSD”) which is offered in our partners platform (Phillip Futures) through its Philip MetaTrader 5.
To illustrate just how well Gold has performed in times of turbulence, I have tabulated the 9 largest market decline in the last 40 years. With exception to the one during the period from 1980 to 1982, gold has largely outperformed the market when there are fears in the market.
For example, during the Great Financial Crisis in 2008-2009, gold outperformed all the other assets by returning 25.5% in that year alone when many investors flock to safety. Even during the recent COVID market crash in Mar 2020, which is still fresh in our memory, Gold protects the portfolio by returning just -4.9% in the volatile period leading up to the crash.
An alternative play to having some sort of equalizer in the portfolio is to consider what Ray Dalio did with his All-Weather Portfolio.
As the name itself suggests, the “All-Weather” portfolio is constructed in such a way that it can perform considerably well under all economic cycle.
- Rising Prices (Inflation)
- Falling Prices (Deflation)
- Rising Growth (Bull Markets)
- Falling Growth (Bear Markets)
The All-Weather portfolio investigates constructing a certain amount of allocation to gold and commodities of not less than 10%, and stocks allocation of not more than 40%. The rest goes into Treasury bonds allocation. So, it could look something like this:
- 40% Stocks
- 40% Bonds
- 10% Gold
- 10% Commodities
Or if you prefer to customize something that is slightly more aggressive in nature, you could replace a similar category with something that’s higher beta and construct it with:
- 30% Stocks and 10% Crypto
- 30% Treasury Bonds and 10% Corporate-rated Bonds
- 10% Gold or Gold-mining companies
- 10% Commodities such as Oil or Steel
Since economic environments do not occur with the same frequency at the same time, the percentage allocation (higher/lower) is there to help maintain and balance the portfolio. The core idea behind the All-Weather portfolio is to let each assets outperform differently based on what is happening in the macroeconomic conditions, ensuring that the overall portfolio returns remain decent and with lesser volatility risk.
To illustrate just how well the All-Weather Portfolio performed during the Great Financial Crisis and the recent COVID-19 crisis, the portfolio declined by just 2.96% and 0.48% as compared to a portfolio that is having a 60/40 bonds allocation.
When we compare the portfolio in a 10-year timeframe, that is one very impressive stats indeed.
The above illustrations of constructing a well-balanced portfolio is one thing which investors can undertake on the Phillip MetaTrader 5 platform.
For an exposure to Gold – you can either consider the Gold Spot (“XAUUSD”) or the VanEck Vectors Gold Miners ETF (“VANGLDMIN-NYSE”), which is an ETF that comprises of gold mining companies. This is appropriate for investors who are looking to profit from bullishness in gold due to fear of inflation or doom market scenario.
For an exposure to Commodities – you can consider the Spot Brent (“UKOIL”) or WTI (“USOIL”) Crude Oil which tracks the underlying commodity for oil futures contract. You can also consider other commodity positions such as the Spot Coffee or Spot Cotton on the MT5 platform to take advantage of the rising inflation fears.
For an exposure to Corporate Bonds – you can consider the iShares iBoxx High Yield Corporate Bond ETF (“ISHIYLDCOP-NYSE”) powered by Blackrock, which tracks the investment of high yield corporate debts being issued to investors. It comes with an expense ratio of 0.48% that are automatically built inside the ETF.
Alternatively, you can also consider the NYSE SPDR Barclays Cap High Yield Bond (“SPHIYLDBND-NYSE”) which is powered by Barclays.
For the full comprehensive lists of the CFD contract specification that is offered on the platform, you may refer to the link provided here.
It is also worth noting that at Phillip MT5 – you can further save on your trading costs by eliminating the fees as it is commission-free. That means at any point in time, you can trade in and out to rebalance the portfolio as you like without incurring additional fees in commission charges.
Shares CFDs are also available for zero commission trading from as small as one share CFD on Phillip MT5 – no minimum and platform fees required.
If this is something that you’d like to explore, I encourage you to download their free Demo account in this link here and see if you like it. It is absolutely free of charge, and you can try and see if that works out well for you.
You may also register your interest by signing up on your account directly if you like what you see. Scan the QR Code below with your phone for registration which will bring you right to action packed activities almost immediately.
Disclaimer: This post is written in collaboration with Phillip Futures. However, all opinions stated are that of my own, based on my research study and experience and services received from Phillip Futures.