[Finance Wiz@Daniel] Asset allocation in 2023

[Finance Wiz@Daniel] Asset allocation in 2023

[Finance Wiz@Daniel] Asset allocation in 2023

FINANCE

2023-03-08

5  Mins Read

Agonised by factors like heightened geopolitical risks and persistent inflation, it was a gloomy market last year. Many investors are still traumatised with the plunge in both the stock and bond markets and the multiple setbacks in The Standard and Poor's 500 Index.

In view of last year’s dreary market, everyone may have the same question: can investors see the rainbow after the storm in 2023? In this article, I will analyse in detail based on various pieces of historical data and look into the investment opportunities and risks ahead.

What the S&P 500 index is trying to tell us

The S&P 500 index is widely regarded as the best gauge of large-cap U.S. equities. It includes 500 leading companies and covers approximately 80% of available market capitalisation.

When it comes to market trends, the S&P 500 index is a great indicator. If you look at the return rates over the past 100 years of the S&P 500 index, you can see a clear trend. Negative returns were recorded in 1974, 2002 and 2008, but in the years right after, 1975, 2003 and 2009, we can see a positive, rising trend in the total rate of returns. Therefore, whenever there is an asset slump, there is a chance of rapid rebound in the following year. The U.S. 10-year Treasury also showed a similar trend.  

 

Take reference to the 60/40 portfolio

In addition to the S&P 500 index, you may also take reference to the performance of the 60/40 portfolio. It had been a highly-regarded portfolio in the past, with investors putting 60% of their assets in stocks and 40% in bonds in order to mitigate the negative impacts of market fluctuation.

However, its performance took a nosedive in 2022. That was when many investors started to agree that doing nothing with their cash was the winning formula instead. So, looking to 2023, will cash outperform the stock market again? Let’s take a look at the graph below.

The historical data tells us that this winning edge won’t last long. Since 2003 (excluding 2022), there were only 4 years where cash outperformed the 60/40 portfolio, but in the following year of each of these 4 cases, the 60/40 portfolio would outperform cash again. A good example is 2009, the year following the global financial crisis, which saw the return rates of the 60/40 portfolio outshine that of cash.

In short, even though both stocks and bonds tumbled and cash outperformed most assets in the past year, it doesn’t mean you should keep locking up cash for returns this year.

Time Deposits vs Investing

If you are considering locking up most of your cash in time deposits at the bank, bear in mind the fact that though time deposits are one of the more conservative options, it has time constraints.

If the fixed term is too long and the Federal Reserve System (Fed) changes its course in the latter half of 2023, you may miss out on the potential market rebound. Another consideration is that inflation has elevated in recent years. The returns from time deposits may not be able to act as an offset. Whether you are hedging against inflation or leaving a legacy for your family, you should consider a diverse investment portfolio. You can also put aside funds for this year, simply because once the Fed plans to cut the interest rate and the economy starts to recover, you will be able to seize the opportunities.

Leverage existing FX to invest in different products

Apart from time deposits, many investors trade foreign currencies to try and make a profit. However, the Fed’s interest-rate hike has led to the continuous depreciation of all other currencies and their returns fall short of expectations.

Although it is still unknown when they will break even, I suggest that investors make use of the foreign currencies on hand to invest in products among different markets. When their prices return to the normal levels, you can seize the relevant market opportunities.

There are also life insurance plans that offer additional investment options with great flexibility. Some of them even offer a range of currencies for investors to choose from or allow them to switch between options for fund investment according to the market conditions, not letting any opportunity slip by.

In the long run, when both stocks and bonds are back on track and foreign currencies return to or exceed their bid prices, the yields will increase accordingly. Furthermore, when the policy holder passes away, their legacy can be passed down to the next generation, facilitating the succession of their wealth

 

Time to allocate your assets

It is still unknown whether investors will see the rainbow after the storm that was 2022, but in the long run, it is never too early to allocate your assets. For the sake of accumulating wealth, combating inflation and passing down your legacy, you may consider investing through financially-strong companies and leverage their professional teams to come up with a strategy encompassing offensive and defensive moves so as to optimise your returns and turn the tables in the new year.

Watch the clip and learn more about the investment opportunities and risks ahead.

The above content is reviewed by Mr Daniel Lau - Head of Investment Proposition of AXA Hong Kong and Macau.

No warranty or responsibility is assumed by AXA Hong Kong and our related or holding companies regarding non-infringement, security, accuracy, completeness, adequacy, reasonableness, fitness for a purpose or free from computer viruses in connection with the information and materials provided.  AXA Hong Kong and our related companies and holding companies do not accept any liability for any loss, damage, cost or other expense, whether wholly or partially, directly or indirectly, arising from any error, inaccuracy or omission of the information and materials to the extent that such liability is not excluded by law.

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