How to diversify your portfolio to avoid market risks (8/20)

Stocks and bonds are typical of an asset allocation portfolio. The classic "Graham" allocation with 50% of bonds and 50% of stocks is among those that offer the best return/risk ratio.

Graham even suggests that the slightly more active investor should oscillate his share of stocks (and therefore bonds) between 25 and 75% depending on the market level, with the equilibrium point remaining at 50%. Personally, even if I find it enormous to allocate 50% to bonds, I like Graham's approach which involves thinking in terms of the relationships between these two assets, since we know that long-term bonds offer a good negative correlation to stocks.

However, it should be noted that the very expansionist policy of central banks is currently problematic from this point of view. Indeed, for several years now, we have seen a simultaneous rise in the price of shares and long-term bonds, going hand in hand with a fall in the yield of these two assets. It is therefore difficult to arbitrate between the two.

Stocks are overvalued compared to the increase in GDP and bonds are yielding practically nothing. They may even fall if inflation shows up, which is quite possible. In the 1940s, the US had low rates like now and inflation has only increased over the next 30 years...

Since the abandonment of the gold standard, deflationary phases have become much rarer than inflationary phases, which does not speak in favor of long-term bonds, especially not at the moment. It could therefore be that stocks will still remain more attractive than bonds, despite the significant increase in their prices.

To recap, regarding long-term stocks and bonds: buy sparingly and arbitrate between the two. So, for each stock position, you need a certain weighting in long-term bonds or vice versa. Personally, I am not comfortable with bonds directly, so I hedge (a small part) my stocks with the CSBGC0 ETF. It is not very long term, but we are still on 7-15 years and the return/risk ratio is better.

For stocks, those who do not want to buy them directly online can fall back on the ETF CHSPI (Swiss Performance Index) or CHDVD (Swiss large capitalizations paying dividends). Paradoxically, I am not a huge fan of the latter because it considers that companies that pay a dividend only 4 years out of 5 can be included in the ETF. This is clearly insufficient.

Of course, you can also choose your stocks, especially quality companies that have been paying increasing dividends for decades (yield greater than 2% with a distribution rate lower than 70%). This is the best antidote from the stock point of view to the various crises (inflation, deflation, recession).

However, you have to be aware that only a very small minority of investors (about 10%) manage to do better than the market. So when in doubt, fall back on the ETF. I will give some small tips later on to do better than the market.