Outlook '08: Spread The Risk In Your Portfolio

With 2008 likely to be another volatile year for the markets, many money managers say a well-diversified portfolio is more important than ever, but some experts have varying ideas about what's in store for the different asset classes.


Michael Cuggino, portfolio manager of the Permanent Portfolio Fund, says there are currently a lot of economic and political uncertainties. Given that, he says “it would seem that an asset allocation diversification strategy would be extremely helpful for investors that don’t want to play the volatility on the market.”

To execute his fund’s asset allocation strategy, Cuggino invests in a combination of U.S. stocks and bonds, foreign bonds, real estate and commodities. “We think an investor needs some exposure to all if those areas and failure to do so opens up holes in an investor’s diversification strategy,” he says.

Because the fund, which is designed to preserve capital and provide low-risk growth, is more conservative oriented, Cuggino targets about a 15 percent weighting in U.S. stocks. His outlook on the group, though, is pretty optimistic.

“We think the economy will continue to grow and withstand risks to it,” he says, adding that currently, he expects the fund is probably a bit overweight U.S. stocks.

Pros And Cons Of Stocks

Paul Hickey, co-founder of money management and equity research firm Bespoke Investment Group, also has a bullish outlook for stocks, calling them “attractively valued.”

“They should be an area where investors should continue to do well,” he says.

Hickey likes growth and large caps, which he believes will do well in the current environment. In terms of sectors, he favors technology, healthcare -- specifically healthcare technology and biotech -- and industrials, such as infrastructure companies.

On the flip side, Hickey is wary of consumer staples. They may experience a pullback as the sector has gotten relatively expensive, he says.

David Reilly, director of portfolio strategy with Rydex is betting on stocks that have exposure to overseas growth, including cyclicals, such as energy, technology, materials and industrials.

Reilly says the market is in a late-cycle slowdown, which doesn’t usually favor cyclical stocks. However, because of the global economy, sectors that have significant revenue sourced overseas are likely to do well.

He recommends avoiding financial and consumer discretionary stocks; while they may be near-term oversold, it is still hard to a make long-term case for them given the magnitude of subprime crisis and the decline in consumer sentiment.

(If you are a more aggressive investor you will likely have a greater allocation to stocks, though each investor’s asset allocation should depend on their risk tolerance and time horizon.)

Others are less positive on stocks.

Vern C. Hayden, founder and president of the Hayden Financial Group anticipates a “negative” year for stocks. “There is always some stock that will go up but I would be more concerned with not losing money next year,” says Hayden.

“I would have at least 50 percent of my portfolio in a defensive position,” which includes having about 30 percent in fixed income, explains Hayden. “If you have a total return of 6 percent it is very attractive from the standpoint of protecting your portfolio and creating some gain.”

Cuggino, who currently has about 35 percent invested in U.S. fixed income, says in this environment quality and valuations matter when investing in that area. That’s why he is invested in Treasuries and primarily high-grade corporate bonds. Corporate spreads are pretty good versus Treasuries, he says, adding that U.S. blue chip corporate names with reasonable yields may be attractive.

Metals Alluring

Cuggino also has about 30 percent allocated to precious metals -- 20 percent in gold and 10% in silver. “We invest in gold and the reasons are obvious, “ he says. “It’s an anti-inflation hedge, an alternative currency that transcends paper money.” He invests in silver for many of the same reasons, though he added that it has more industrial use and is therefore a little more tied to economic activity.

In addition, he has about a 15 percent weighting in a combination of U.S. and foreign real estate and natural resources, such as timber and agricultural commodities as they are highly cyclical and dependent on economic growth.

Rydex’s Reilly is also a fan of commodities across the board. Even though there has been a huge run-up, he says, “long-term this is pure and simple a supply-and-demand situation.” The supply of commodities takes a long time to ramp up and isn’t able to satisfy demand as fast. Right now the demand for commodities is bordering on insatiable and that will likely continue across the board, he said.

Reilly isn’t as fond, however, of the U.S. dollar, which has been very weak. While there may be bounces along the way, he says, the fundamentals don’t make a good case for the currency.

Reilly is also negative on real estate, saying that while longer term there could be bounces, the fundamentals look bleak.

“Since we don’t think all shoes have dropped with subprime, it’s awfully difficult to be bullish on real estate.”

Hickey is also wary. “We think the homebuilding stocks will bottom out before the real estate sector [so] rather than gauge when the real estate market bottoms out we would look to homebuilding stocks for guidance.“