Fine-Tune Your Global Economy Portfolio for 2013

CNBC.com

Fine-Tuning Your Global Economy Portfolio

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In the 21st century of , we’re long past the , , cash triangle of asset allocation upon which many retail investors grew up.Investors have more options and choices, from asset classes to the financial instruments to play them. Low-cost online brokers and trading platforms have given investors direct access to a world once open only to professional traders and institutions.IRAs and 401(k)s offer a world of opportunity, whether its equities, fixed income, , real estate, or ."We think the retail in
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Investors have many options and choices, from asset classes to the financial instruments to play them. Low-cost online brokers and trading platforms have given investors access to a world once open only to professional traders and institutions.

IRAs and 401(k)s offer vast opportunities, whether it's equities, fixed income, currencies, real estate, or commodities.

"We think the retail investor has gone a bit more global and become a bit more sophisticated in the type of assets being included in their portfolio," says Mitch Schlesinger, CFA, chief investment officer at FBB Capital Partners in Bethesda, Md. "They are definitely open to alternatives to the plain vanilla."

But variety brings volatility, which offers both risk and reward. Major events, such as the Arab Spring or EU sovereign debt crisis, have sometimes made the global economy seem like a small place, where markets move in lockstep around the globe from sunrise to sunset.

But savvy, open-minded investors know there are always profitable plays in countries and asset classes.

So as 2013 dawns, click ahead to see how your portfolio should reflect the global economy and the wide world of finance.

By CNBC.com

Updated Dec. 19, 2012

Rock Steady, Keep Your Balance

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Sure, being global can mean greater uncertainty and volatility, as well as more risk.
Photo: Getty Images

Sure, being global has its risks and surprises.

And, yes, the EU crisis has had its ups and downs, marked by much-awaited statements and actions from German leader Angela Merkel, Greek Prime Minister Antonis Samara (both pictured here) and other European leaders.

The market impact? A series of trenches and hills for the world markets.

"Dollar-cost average," advises T. Dale, chief investment officer of Security Ballew, referring to the idea of keeping your purchases steady during both good and bad times, thus averaging out your cost.

"Don't pull back," he says. "My job is to bring a level of sanity at times of extremes."

In other words, if an investment was worth it at one price, it is usually worth it another, lower price.

Dale, whose Jackson, Mississippi based firm manages defined contribution plans for small companies and their employees, says dollar-cost averaging is particularly valuable for investors with "a 20-year-plus horizon."

Along the same lines, rebalance your portfolio, so your allocations remain near your target levels.

From Europe to the U.S., the financial crisis has been very good to fixed income instruments, and smart investors have intermittently redistributed some of those gains.

Diversify, Diversify, Diversify

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"This comes up a lot with clients," says Romano of Moss Adams. "They say, 'Why are we going into foreign equities when it doesn’t appear there is any difference in returns with US equities? We come back to the idea of the global economy. It would be inappropriate not too."Diversification, at it's simplest, means spreading your money among different asset classes — stocks, bonds, commodities, real estate.Advisors say diversify again. Own stocks from the U.S., other developed countries and emergin
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"This comes up a lot with clients," says Jason Romano, a partner with Moss Adams Wealth Advisors. "They say, 'Why are we going into foreign equities when it doesn’t appear there is any difference in returns with U.S. equities? We come back to the idea of the global economy. It would be inappropriate not to."

Diversification, at its simplest, means spreading your money among different asset classes — stocks, bonds, commodities, real estate.

Advisors say own stocks from the U.S., other developed countries and emerging markets. Your bond holdings should include sovereign debt (U.S. Treasurys, for example) corporate debt, municipal bonds, even sub-investment grade (junk) bonds. Invest in a basket of commodities (gold, crude oil, wheat), not just one or two. Don't struggle over commercial vs. residential real estate; try both.

Don't stop there: Consider individual stocks, mutual funds, exchange traded funds and limited partnerships — all of which have unique qualities.

Think Global, Go Global

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Like with the United Nations, the U.S. may be a key player, but it's not the only one, as one international crisis after another in the past 15 years moved markets all over the globe.Dale of Security Bellew says one third of long-term investors' equity allocation should be international, both developed and developing markets.Note that during much of the last decade international stocks outperformed US ones.During the commodities boom, countries rich in natural resources — Australia, Canada, Braz
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The U.S. is a key international player, but it's not alone, as one global crisis after another in the past 15 years has moved markets around the world.

Dale of Security Bellew says one third of long-term investors' equity allocation should in both developed and developing markets.

Note that during much of the last decade international stocks outperformed U.S. ones.

During the commodities boom, countries rich in natural resources — Australia, Canada, Brazil, South Africa — had booming economies, which boosted the value of their stock markets and currencies.

More recently, investors who wanted sovereign debt other than U.S. Treasurys shied away from EU countries and gravitated to emerging markets.

"There are opportunities in some emerging debt," notes Phil Cook, founder of Cook & Associates, a financial planning firm in Manhattan Beach, Calif.

Emerging Markets, Ports of Opportunity

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If the world's biggest companies want a piece of emerging markets, then you probably do, too.Ports from China to India to Brazil are humming, as the trade balance shifts. High demand, strong growth and more stable, transparent economies male emerging markets more attractive than ever."I look at the BRICs as companies with great products, low-cost labor and natural resources," says Cook. "Opportunities exist."Though Brazil, Russia, India and China still draw the bulk of investor capital, there ar
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If the world's biggest companies want a piece of emerging markets, then you probably do too.

Ports from China to India to Brazil are humming, as the trade balance shifts. High demand, strong growth and more stable, transparent economies make emerging markets more attractive than ever.

"I look at the BRICs as companies with great products, low-cost labor and natural resources," says Cook. "Opportunities exist."

Though Brazil, Russia, India and China still draw the bulk of investor capital, there are other choices in Asia, Africa, the Middle East and Latin America.

"We use emerging markets traditionally on the equity side, as a diversifier, to broaden the foreign exposure," says Romano of Moss Adams. "We believe emerging markets are in the same category as U.S. core or foreign core."

While the U.S. market plunged in late 2008 and early 2009, emerging market stocks were soaring.

There's now an enormous universe of emerging-market exchange traded funds: single country, regional or global; equity, bond, currency.

As a rule, experts advise broad exposure and discourage single-country funds, but a lot depends on your risk tolerance.

"We’re using ETFs for both equity- and debt-based investments — both regional and broad based," says Schlesinger of FBB Capital Partners. "On the equity side, it's a little easier to go regional, even country specific."

A Taste of Commodities

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Commodities prices are volatile, and in the case of agricultural products very vulnerable to weather, but anyone who invested in corn has been licking his lips over the drought-related spike in prices.Likewise, investors with a little courage could have rode the rose and fall of crude crude oil prices  in the 16 months, betting that tension in the Middle East  — from a number of sources — would jack prices (as they did several times, most recently with the popular uprising in Syria.)By owning co
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Commodities prices are volatile, and in the case of agriculture, very vulnerable to weather — but those who invested in corn have been licking their lips over the drought-related spike in prices.

Likewise, investors with a little courage could have ridden the rise and fall of crude oil prices in the last 16 months, betting that tension in the Middle East — from a number of sources — would jack up prices (as they did several times, most recently with the popular uprising in Syria.)

By owning commodities "you can juice your portfolio returns a little," says Cook, who favors natural resources (oil, gas, timber) more than food-based commodities.

"There's always a demand, and while it waxes and wanes, there’s always periodic opportunities," he says.

Other advisers, such as Romano of Moss Adams, recommend "a diversified commodities portfolio."

Either way, there are several plays with commodities, whether it's a single company (gold producers), mutual funds or exchange traded funds, many of which track futures indices.

The consensus portfolio allocation is a maximum of 5 percent.

Real Estate, Real Alternative

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At the height of the real estate recession, you want not have had the money or courage to buy a house or apartment building at a bargain-basement price, but investment funds that did profited handsomely.Real estate is simply too big a part of the economy to overlook; "Real estate should be one of the basic foundations," says Cook of Cook & Associates, who is now over-weight in real estate and recommends commercial over residential, because "that where the greatest potential for the upside is."Da
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At the height of the real estate recession, you may not have had the money or courage to buy a house or apartment building at a bargain-basement price, but investment funds that did profited handsomely.

Real estate is simply too big a part of the economy to overlook, say experts.

"It should be one of the basic foundations," says Cook of Cook & Associates, who is now over-weight in real estate and recommends commercial over residential, because "that's where the greatest potential for the upside is."

There are a few funds investing in home builders, but there are many more real estate investment trusts, REITS, to offer you both residential and commercial exposure.

There are even ETFs that buy REITS. Either way, REITs have outperformed stocks in recent years and shown far less volatility.

"We tend to look at REITS as a good diversifier," says Romano of Moss Adams, noting that he only invests in publicly-traded ones.

And, yes, there are global REITs.

Be Frugal, Be Nimble, Be Quick

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Just because it's a big world, you don't have to be a big spender.Traditional mutual funds have varying fees, but they can sometimes take a big bite out of your profit. The proliferation of stock index funds and exchange traded funds has given investor low-cost alternatives, which make buying into the global economy cheap and easy.ETFs also give investors more flexibility; because they trade like stocks you can buy and sell them anytime during the trading day, rather than waiting until the close

Just because it's a big world, you don't have to be a big spender.

Traditional mutual funds have varying fees, but they can sometimes take a big bite out of your profit. Stock index funds and exchange traded funds have given investors low-cost alternatives, which make buying into the global economy cheap and easy.

ETFs also give investors more flexibility; because they trade like stocks you can buy and sell them any time during the trading day, rather than waiting until the market close.


Short Story — Hedge

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Investors may be forever hopeful, but there's sometime reason to add a little negativity to your portfolio — just in case.Few advisors are wont to recommend short, or inverse, funds, but they can work well for investors, "depending on their level of sophistication and interest, " says Romano of Moss Adams, adding he uses them "as a diversifier, as part of our hedge allocation."For instance, those who believe that the recent stock market run-up is based on blind faith and will eventually be undon
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Investors may be forever hopeful, but there's sometimes reason to add a little negativity to your portfolio — just in case.

Few advisers will recommend short, or inverse, funds, but they can work well for investors, "depending on their level of sophistication and interest, " says Romano of Moss Adams, adding he uses them "as a diversifier, as part of our hedge allocation."

For instance, those who believe that the recent stock market run-up is based on blind faith and will eventually be undone when the reality of the 'fiscal cliff' sinks in might want to look at short funds.

Dale of Security Bellew says inverse funds are not for retail investors (he uses them for his personal account), and believes "hedging [equity risk] can better be done with fixed income," especially on a longer-term basis.

Those who bought into an inverse euro ETF were not disappointed after the single currency finally succumbed to the sovereign debt crisis in the wake of election surprises in Greece and France in late May.

Going Long — Annuities

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With the global economy pressuring companies on cost, workers have been forced to take more responsibility for their retirement. Expensive company pensions are now the exception; 401(k)s and IRAs have become the norm.Though these company-sponsored savings plans may offer flexibility and choice, few offer annuities, which provide regular, guaranteed, long-term pay-outs, rather than lump-sum ones, upon retirement. Though the returns are modest — generally around 4 percent — investors are sparred t
Photo: Svetikd | The Agency Collection | Getty Images

With the global economy pressuring companies on cost, workers have been forced to take more responsibility for their retirement. Expensive company pensions are now the exception; 401(k)s and IRAs have become the norm.

Though these company-sponsored savings plans may offer flexibility and choice, few offer annuities, which provide regular, guaranteed, long-term pay-outs, rather than lump-sum ones, upon retirement. Though the returns are modest — generally around 4 percent — investors are sparred the volatility of stocks, bonds and commodities.

More workers — many of them worried about outliving their retirement nest egg — are asking their companies to include them in the 401(k) plan and more companies are offering them to IRA clients. The US government has even made it easier to convert some of your 401(k) savings to annuities.

In a way, annuities are the final piece to the diversification puzzle; you just have to live long enough to see it work.