Create a portfolio with airbags

I recently invited foreign policy expert, Peter Brookes, to Denver to speak about flashpoints, hot spots and other challenges to international stability and security. Brookes, a Senior Fellow for National Security Affairs with The Heritage Foundation, provided an overview of the unsettled global geopolitical landscape. Among the greatest threats to international security outlined by Brookes are Iran, North Korea, Syria, China, and cyber-terrorism.

Indeed, a recent Morgan Stanley Investor Pulse Poll showed foreign issues at the top of financial concerns among Denver investors. Some 87 percent of those polled say they are concerned with increased foreign conflicts, topped only by the issue of the US budget deficit (91 percent). The survey of 300 Denver area investors with $100,000 or more in investable household financial assets was conducted January to March 2013.

Diversify your Portfolio

Events produced by an unstable global environment could have a major impact on your investment portfolio, creating a need to build what I call a “portfolio with airbags”. Make sure your portfolio is diversified. There are asset classes which, in the past, have not correlated directly with stock and bond markets during times of distress.

These asset classes are sometimes referred to as “alternative investments” because of their low correlation to stocks and bonds. An investment in alternative investments can be highly illiquid, is speculative and not suitable for all investors.   Remember, past performance is not a guarantee of future performance.

Also, be sure your asset allocation is consistent with your need for both return and risk management; avoid the temptation to “time” the markets.

Investing in International Equities

Concern about overseas events should not cause investors to ignore overseas investment opportunities. The Investor Pulse Poll showed that many investors tend to steer away from non-U.S. investment opportunities, despite the higher economic growth rates in countries such as Brazil and China. According to the survey results, countries identified by Denver investors as “good” places to invest are the U.S. (55 percent), China (44 percent), Brazil (41 percent) and India (37 percent). Far fewer see the Middle East (7 percent) or Russia (6 percent) as good places for investment.

At present, our moderate risk portfolio for equities is 15 percent U.S. stocks, 17 percent international stocks and 10 percent emerging-markets stocks.