Attention moderates. Here's an investment plan built just for you | The Rational Investor

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Robert Stepleman

Robert Stepleman

The 2022 returns of almost all publicly traded investments were disappointing. There was nowhere to hide, be it bonds, stocks, real estate or even supposedly “safe” crypto. Even investors who used the “gold standard” 60/40 asset allocation – that is, 60% U.S. stocks and 40% U.S. bonds – likely saw a return of about minus 16%.

Currently, the U.S. stock market is relatively reasonable, with a price-to-earnings ratio (P/E) in the 18 range, so there’s hope for positive stock returns in 2023; however, that’s what many forecasters mistakenly said about 2022. Additionally, with interest rates likely to continue moving higher, low, or even negative single-digit returns from medium- or long-term bonds are possible. Due to the war and energy uncertainty, even with their lower P/E’s, foreign stocks’ returns are more uncertain than U.S. returns.

This year, investors’ returns could still benefit from a well-diversified portfolio weighted toward stocks. Here, I provide an asset allocation that’s simple to implement and could deliver reasonable performance under expected market conditions. The compound annualized return of these annual portfolios has been about 8% since 2001; last year’s return was minus 14.3%.

The asset allocation is based on two factors: My view of asset class performance for 2023 and recent asset class capitalization around the world.

For example:

• Recently, the world’s equity market capitalization was recently roughly 60% non-U.S. and 40% U.S.

• The U.S. equity market consists of roughly 70% large-caps, 20% mid-caps and 10% small-caps.

• The world’s bond market capitalization was recently roughly 62% non-U.S. and 38% U.S.

I’ve weighted my personal views more heavily than actual asset class capitalization, partly because U.S. investors pay their bills in dollars not euros.

This year’s “Moderate Investor’s Asset Allocation” is 65% stocks and 35% shorter-term fixed income (incudes cash). This is because of continuing risk and uncertainty in stock returns.

In parenthesis after each asset, I provide the ticker symbol of one low-cost implementation option.

The asset allocation is:

• 20% put into an U.S. Total Market index fund (VTI).

• 10% put into a small-capitalization U.S. stock fund (VB).

• 10% put into a diversified international stock fund (VEU).

• 5% put into an emerging market fund (VWO).

• 10% put into Real Estate Investment Trust fund (VNQ).

• 10% put into large- and mid-capitalization common stocks with a history of paying competitive and increasing dividends (VIG).

• 30% put into a diversified portfolio of short-term corporate bonds (VCSH).

• 5% put into cash equivalents.

This asset allocation adheres to generally accepted investment precepts: The equity part should provide exposure to the world’s stocks; the fixed-income part should provide income and lower volatility; and the cash part should provide a cushion to protect against forced sales of other assets at “fire-sale” prices.

This isn’t a portfolio for either investors with a speculative bent or very conservative ones. The former would be better served by a more stock-oriented portfolio with heavy exposure to NASDAQ stocks, and the latter with a more shorter-term bond-oriented portfolio.

All data and forecasts are for illustrative purposes only and not an inducement to buy or sell any security. Past performance is not indicative of future results. If you have a financial issue that you would like to see discussed in this column or have other comments or questions, Robert Stepleman can be reached c/o Dow Wealth Management, 8205 Nature’s Way, Lakewood Ranch, FL 34202 or at He offers advisory services through Bolton Global Asset Management, an SEC-registered investment adviser and is associated Dow Wealth Management, LLC.

This article originally appeared on Sarasota Herald-Tribune: ROBERT STEPLEMAN: For moderate investors, here’s a strategy for 2023