Three Simple Questions on the Markets, Part III

We asked a group of the region’s leading wealth managers to pen a response to three questions about the markets and how they approach current conditions. Here are their responses to the final question: If you had to put all your money in one asset class today and couldn’t sell for ten years, what would you buy and why?

Robert Y. Kopf, Jr. Smithfield Trust Company: I would put all my money in domestic small cap equities. Historically, this asset class has outperformed most, if not all, asset classes with the downside of greater volatility. However, Doug Heuck’s arbitrary freeze on my assets for ten years mitigates the volatility risk.

Jack Kraus, Allegheny Financial: I would invest my money in a global small cap equity fund. My reasoning is multi-fold. First, since the time horizon is 10 years, I would use equities over fixed income. Over longer periods of time (such as 10 years), equities will typically outperform fixed income. Next, I would want a flexible approach with the largest opportunity set, thus global. Lastly, I would favor small company stocks over large company stocks once again the opportunity set is larger. Lastly, smaller companies have the ability to grow at a faster pace than large companies and generally out-perform over longer periods of time.

James Armstrong, Henry H. Armstrong Associates: If we had to choose one asset class and hold it for ten years, we would choose a concentrated portfolio of stocks of top-quality global companies that have little debt, dominant business franchises, and demonstrated ability to grow earnings under different economic conditions. Such companies have the ability to shift their focus and their resources as the world changes. They can shift sales resources from one continent to another, for example, as global demand changes. They can invent new products and build new factories in different parts of the world. They are relatively unaffected by changes in interest rates and currency rates. They have the strength and flexibility to adapt. Flexibility and strength are critical; the economic world will change in unpredictable ways over the decade, and your question requires us to hold the asset for ten years, come what may.

Henry S. Beukema III, Guyasuta Investment Advisors: For investors with a ten-year holding period, our recommendation is to own equities. High quality stocks provide long-term capital appreciation potential and dividend income. In addition, equities historically have been able to absorb inflation more effectively than bonds. Many equity investors are concerned with the length of the current bull market that has lasted over 96 months vs. the historical average of 55 months. It should be noted that the longest bull market was in the 1990’s, which lasted 115 months. During the next ten years, there is a high probability of a bear market. Since 1929, the average equity bear market has lasted 25 months and the average losses have been approximately 45%. While there could be potential “paper” losses during any ten-year holding period, high quality equities are an excellent long-term investment.

Jeff Muhlenkamp, Muhlenkamp & Company: A diversified basket of quality stocks. Long bonds are overpriced relative to current inflation so, unless you get outright deflation for a decade, you won’t make much money in real terms. The odds on long-term deflation occurring are not zero, but they’re low. Commodities for the long term are challenged because we keep figuring out ways to get more output for less input, so on an inflation-adjusted basis commodities get cheaper over time and you can’t make good real returns there. Real estate on average keeps up with inflation. Over the long haul stocks are still your best bet, even if you’re not buying at the bottom.

Gregory J. Sorce, HBKS Wealth Advisors: We believe in broad diversification among many asset classes. That being said, we believe foreign stock market returns will outperform domestic stocks over the next ten years because in general valuations are cheaper and growth is stronger in many areas outside of the United States. So if we were forced to put all our money in one asset class for ten years we would invest in global equities.

Mike Kauffelt, II, Bill Few Associates: Nice try editor. I know it’s a great question to ask, but I would never put all my eggs, or anyone else’s, in one basket, no way. The rate of change in the economy and the world seems to be accelerating at an ever faster pace. The buy and hold philosophy still makes sense, but it needs to be a diversified bundle that you’re willing to rebalance both when you win or when you lose. Most of us can’t accurately forecast what will happen 12 months from now; I’m not any more confident that my ten-year forecast would be better. Again, nice try.

Thomas L. Wentling Jr., Wentling Tarquinio Loughney Wealth Consulting Group, UBS Financial Services Inc.,: Stocks, stock, stocks. This is not trees grow to the sky thinking. No returns will be good over the next ten years, as we’re starting from lofty levels for everything except commodities. The question is which will be the least bad. I want to own businesses that can react to an ever changing world in pursuit of profit — not be locked into an interest rate or a basket of things (commodities) that have no intrinsic value, except as they are processed or improved upon, by a business (which I want to own) for sale. As well, gold and silver not only don’t pay a dividend, but you must pay to store and insure it. A diversified basket of stocks is the commodity I want to own.

John Augustine, Huntington Bank: In our view at Huntington, investors with a time horizon longer than three years need to stay overweight to stocks. Why? Several reasons: 1) interest rates are more likely to rise than fall, and that would suppress bond investor returns; 2) global central banks have too much invested in quantitative easing programs to not see a better global economic circumstance over the next several years; and 3) while government debt is THE issue for the next potential recession, governments are more likely than not to promote inflation as a way to lower their stress (after the low interest rate environment wanes). If inflation does return, an investor does not want to be in bonds, but in small- and mid-cap stocks.

Gregory Curtis, Greycourt & Co.: After so many years of quantitative easing, there are no screaming buys out there. But if I had to choose I would buy emerging markets companies that are not dependent on commodity exports or U.S. dollar funding. Instead, I would focus on companies – and countries – whose destinies are linked to the rapid domestic growth of their own middle class consumers. Examples would be companies serving emerging economies in the IT, consumer staples and consumer discretionary industries. Among countries I would overweight India, Hong Kong, Mexico, and Muslim countries like the UAE, Indonesia and Egypt.

Christopher Martin, Northwest Savings Bank: While diversification is generally the best policy for long-term investment, if only allowed one asset class, I would generally go with equities. Some of this would be a function of the potential returns for other asset classes. With the current yield on a ten-year U.S. Treasury hovering around 2.5%, there is limited upside for fixed income, even looking at a ten-year time horizon. While I certainly think there will be some periods of volatility with stocks over the next decade, over the long-term, stock prices will follow economic growth higher.

Michael Lynn, Hampton Wealth Management: Since so many factors can go awry within any cyclical or secular outlook, we coach our clients to behave accordingly for the “certainty of uncertainty”. As fiduciaries of our clients’ capital, we pride ourselves in doing a few things critically well: 1) we accurately measure risk tolerance as a stable personality trait so that clients can remain fully invested, 2) design extremely well diversified asset allocation models that map onto a client’s psychometric risk profile and educate them on expectations in order to obtain informed consent, and 3) then stress test their financial plans for durability of achieving all of their needs, wants, and wishes. By keeping costs reasonably low and investing alongside our clients, we believe these are the key ingredients for holding over the next 10 years.

Michael R. Foster, BNY Mellon Wealth Management: We recommend broadly diversified portfolios with allocation weights based on our extensive investment insights and in context of our clients’ unique wealth goals. That said, domestic large cap stocks have been and continue to be our largest weighting. Assuming at least some of the President’s legislative agenda is enacted, domestic large caps are well positioned for an environment of higher growth with lower taxes and less regulation.