Structuring Your Stock Portfolio for an Evolving Geopolitical Landscape
Investment Levers and Philosophy Overview
As our clients approach retirement, they’re often planning for a potential 30-year or longer time horizon. No matter how meticulously they prepare, relying solely on fixed income usually isn’t enough. Even robust bond investments or well-structured bond ladder strategies often require a faster-growing counterpart to maintain the principal of the portfolio.
To ensure long-term success and maintain a portfolio that keeps pace with inflation, it’s crucial to integrate a portion of equities into your retirement planning.
In this article, we delve into the importance of investing in stocks, explore dynamic factors for global asset allocation, and discuss strategies for positioning stocks or equity holdings to achieve sustainable growth.
A Stock-Free Retirement Portfolio is Possible but Not Ideal
While it is possible to manage retirement funds without assuming equity risk, it is uncommon. Most people require some form of return growth to achieve their retirement goals—whether that involves traveling, living comfortably and worry-free, or leaving a larger legacy.
This need is especially important for those without a pension or substantial Social Security benefit adjustments for inflation. Without income streams tied to inflation, aligning assets with liabilities becomes challenging, due to the uncertainties of your lifespan, future inflation, and potential unexpected expenses (e.g., long-term care).
Consequently, a portfolio often needs returns beyond what a laddered treasury or fixed-income portfolio can offer. As a result, the vast majority of our clients find it necessary to include stocks in their portfolios.
Total retirement assets in our country have closely correlated with U.S. corporate profits. The more profitable our economy has been, the more people have tended to accumulate in their retirement accounts for their future.
Historically, participating in equity investments and the growth of the economy has been a good idea. Even today, we continue to see that trend. The more you save and invest in the equity of companies here in the U.S. and globally, the greater the likelihood of an increase in your overall wealth over time.
Dynamic Factors to Consider for Global Asset Allocation
Asset allocation is an active decision. When deciding on an asset allocation, such as which countries, regions, and sectors to invest in, it’s crucial to understand the broader economic and political landscape. Factors like economic policies, fiscal stance, monetary system, and international relationships can significantly impact the success and risk of your investments.
Here are five key factors to consider when determining the best global investment opportunities for your portfolio:
1. Consider the Political Regime
How does a country treat domestic and foreign stock ownership?
Investment decisions should take into account the type of government. In an autocratic government such as China, North Korea, and Iran, power is concentrated in the hands of a single individual with more limited checks and balances on their authority. Conversely, democratic governments strive to allocate authority to the people or elected officials through free elections.
Investing in equities in autocratic countries and emerging markets can be particularly unpredictable due to the rapid changes that can occur without due process. Further, these countries often have weaker protections for stock ownership and less robust support for their major companies.
Alternatively, developed democracies often offer better-defined protection of rights and assets, structured processes, and legal frameworks for owning equities. This can create a more predictable environment for investments compared to autocracy.
If you’re looking to invest outside your home country, consider the following:
- How the regime treats domestic stock ownership.
- Legal implications for foreign stock ownership.
- Rights of property owners in foreign jurisdictions.
- Treatment of foreign direct investment (FDI).
While each system has flaws, a democracy has typically provided a more favorable environment for investment to this point.
2. Access to Critical Resources
Is this country self-sufficient, or does it heavily depend on other nations for essential resources and needs?
Natural resources are vital for many countries’ economies, contributing significantly to export revenues and government incomes. Access to an abundance of natural resources can drive economic development and reduce reliance on foreign nations. Conversely, excessive dependence on external sources for essential resources can severely undermine a country’s long-term economic stability.
When evaluating different economies for investment opportunities, including stable countries with a strong historical track record, it’s necessary to look at the drivers of their economies. If their economic success heavily relies on other countries for valuable resources like oil or food, it raises concerns about their resilience in the event of unexpected disruptions, such as a scenario like World War III cutting off access to these resources. Such events could destabilize the economy and impact the companies you’ve invested in, ultimately affecting their returns.
Therefore, understanding a country’s level of self-sufficiency in producing essential goods such as food and energy, or its reliance on diplomatic alliances, is essential when making well-informed investment decisions, particularly for retirement planning.
3. Understand the Status of Global Reserve Currency
How does the country’s current debt level and economic environment compare to its historical trends?
When considering global investments, understand the financial and economic conditions of your target countries.
Key considerations include:
- Currency strength
- A strong currency indicates economic stability, while a weak currency may indicate economic challenges.
- Current account surplus
- Countries with surplus trade flows (i.e., exports – imports) generally exhibit greater financial stability and a lower risk of default.
Changes in these factors directly impact the global economy: international trade, borrowing costs, economic stability, and ultimately the world order that has existed since World War II. This can lead to significant fluctuations in exchange rates, which can affect international investment performance. For instance, currency depreciation increases transaction costs for global companies and makes the affected stocks less appealing to investors.
Also, be aware of the underlying assumptions in your investments. For example, investing in U.S.-based index funds assumes the ongoing global reserve status of the U.S. dollar. Adjusting your investment strategy may be necessary if you believe this status is at risk. This might involve reallocating assets into different asset classes (such as real estate or commodities), regions, or countries less susceptible to such risks.
Lastly, it’s important to remember that the global economic landscape is dynamic. Currency statuses and economic conditions can change quickly and unexpectedly. Maintaining a flexible investment strategy that can adapt to evolving global conditions will lead to long-term investment success.
4. Local Monetary Policy
What are the central bank policy risks across various economies you might choose to allocate money?
The central bank of the United States, known as the Federal Reserve, plays a critical role in shaping the economy and investments. The Fed’s primary responsibility is to maintain a safe, efficient, and accessible system for U.S. dollar transactions, with the main goals of promoting maximum employment and maintaining stable prices. It achieves these twin objectives through monetary policy, utilizing various tools to manage financial conditions and advance this ‘dual mandate.’
Monetary policy is divided into expansionary and restrictive measures, also known as contractionary policies, each designed to achieve specific economic outcomes. Restrictive monetary policy aims to reduce inflation by decreasing the circulating money supply, while expansionary policy increases the money supply to stimulate economic activity.
The Fed adjusts its policies in response to economic conditions, leveraging its dual mandate to regulate the money supply and adjust interest rates accordingly. These adjustments have both short-term and long-term effects.
- In the short term, these policies influence interest rates and corporate activities. This dynamic may not always be immediately apparent and can sometimes have counterintuitive effects; for instance, if inflation rises, interest rates are likely to increase as well. Higher interest rates typically pose challenges for corporate refinancing and borrowing.
The Federal Reserve’s dual mandate can directly influence the performance of your investments in the stock and bond markets. For example, surprise inflation spikes such as the ones we saw in 2021 and 2022 can lead to large increases in market volatility.
- In the long run, this approach strives to act as a hedge against inflation, helping to ensure your money grows at least at the pace of inflation and fosters stability in the overall economic system.
Both short-term and long-term outcomes affect stock portfolio investments, particularly when central banks lower rates or engage in quantitative easing, which can be highly inflationary.
Most developed economies employ similar modern monetary theory practices, and while they may not be as explicit as ours, they use comparable methods of analysis.
It’s important to note that foreign owners of domestic stocks face different legal treatments in various jurisdictions, complicating ownership in certain regions. When selecting equities for your portfolio, research how other central banks operate, treat outside investors, and whether or not they monitor financial markets to avoid actions that could harm the population’s greater good.
There’s a longstanding adage: “Don’t fight the Fed,” which applies to any central banking initiative in any country where you are considering investments. If a restrictive policy is in place, it’s wise to assume that opposing it will likely result in a tougher road. Therefore, being aware of the central bank’s goals and understanding how they will affect your investments is crucial.
How Can I Invest Without Unnecessary Risk?
You cannot eliminate investment risk, but two fundamental strategies—asset allocation and diversification—can effectively manage both systemic and non-systemic risks.
While the popular 60/40 portfolio (60% equity and 40% bonds) has its appeal, there are also drawbacks. Investors managing a 60/40 mix of equity and bond funds face substantial challenges navigating uncertainty and volatility– especially with today’s market environment. Using this portfolio as the sole source of retirement income complicates predicting which part will cover annual expenses, leading to heightened behavioral responses to market risks and fluctuations.
To manage risk effectively, avoid investing in stocks with funds you’re uncomfortable seeing decline in the short term. Equities have typically performed well during high inflationary periods, making them a reliable long-term hedge. When investing in stocks, diversify across multiple investments instead of focusing on one or two companies to benefit from diversification.
Unlike bonds, stocks can benefit from company adjustments, such as CEOs raising prices to maintain profitability amid rising costs, as seen in grocery stores. This ability highlights why diversified stocks are often a superior hedge against long-term inflation compared to fixed-income investments.
At Toberman Becker Wealth, we emphasize diversification as a core strategy for managing risk. We align investments with liabilities by securing eight to ten years of living expenses outside of the stock market and guaranteed by the U.S. government. This approach provides a buffer against potential market downturns, reassuring cautious investors.
Strengthen Your Portfolio to Create Opportunities for Long-Term Success
Investing in the economy and trusting the system is essential for strengthening your portfolio and adjusting for inflation to achieve long-term success.
To this point, the U.S. has created an ideal environment for economic growth and investment. Historical data shows that those who have invested in the U.S. economy have reaped significant rewards. The U.S. has offered the most favorable conditions for stock investing globally, attracting the largest markets and companies to operate here.
When we buy an equity stake in a company, we can be confident that our legal system will accurately record our ownership and protect our shareholder rights. This level of political and legal security is crucial when investing in equities.
This robust legal framework is why so much investment capital has been domiciled in the U.S. over the past century, this environment has consistently benefited investors and become a central theme in the global economy.
In conclusion
Relying solely on fixed-income investments, regardless of their bond strategy’s strength, falls short of meeting sustainable long-term financial needs. Incorporating a significant portion of stocks and equities into retirement planning frameworks is crucial.
At Toberman Becker Wealth, we recognize the interconnectedness of our market’s success with the global economy. We advise our clients to trust the system and diversify by allocating a substantial portion of their nest egg to stock market investments. Our ongoing market monitoring, research, and data evaluation ensure proactive management against potential systemic risks that could impact your retirement. Should adjustments be necessary, we are prepared to act accordingly.
Though we anticipate potential future adjustments to client portfolios, our current stance favors stocks. We’re confident in the system’s resilience despite its imperfections. Utilize our Retirement Decision Dashboard to verify and adjust your portfolio as needed, focusing on what you can control.
Toberman Becker Wealth is a fee-only, independent fiduciary firm based out of St. Louis. Whether starting to dream about retirement in your 50s or actively planning for retirement in your 60s, we help people nearing a transition build a resilient retirement plan. We operate in the best interests of our clients, always, and our top priority is to help you live comfortably now, without sacrificing your financial future later.
If you’re looking for an investment advisor to help you build a diversified retirement plan that ensures comfort and peace of mind, feel free to book a meeting or give us a call.
Continue Exploring Our Retirement Decision Dashboard
Disclosure: Any mention of a particular security and related performance data is not a recommendation to buy or sell. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Nothing on this website should be considered as personalized financial advice or a solicitation to buy or sell any securities.
Michael is a highly knowledgeable and experienced partner at Toberman Becker in St. Louis. With his expertise in investment management, behavioral finance, and retirement planning, Michael is dedicated to providing his clients with the best financial guidance possible.
Having worked with clients on complex estate planning and developing investment strategies for a team of advisors, Michael’s experience spans across various areas of financial planning. What truly sets him apart is his unyielding desire to acquire knowledge for the betterment of his clients. At Toberman Becker, this commitment to continuous learning is the foundation upon which exceptional client experiences are built.
Michael earned a Bachelor of Science degree in Finance and Banking from the University of Missouri – Columbia. Additionally, he holds designations as a Chartered Financial Analyst (CFA) charterholder and Certified Financial Planner (CFP).
Beyond his professional achievements, Michael enjoys a fulfilling personal life in St. Louis. Living with his wife, Lindsey, and their beloved dog, Birk, he finds joy in activities such as golfing together and exploring local restaurants.