The following strategies guide our advice to clients and are reflected in the positioning of the Founders Fund.
We are currently advising caution. Stock and credit (corporate bonds) markets have delivered strong returns over the past several years, which has brought with it increased levels of speculation and risk taking, higher valuations, and even higher expectations.
As a result, we expect stock market returns over the next five year to be lower than the last five. Our outlook for stocks remains positive but we believe returns are likely to be in the range of 4-6% per year (20 to 35% cumulatively over 5 years).
Our outlook for fixed income returns is more encouraging. Current yields are a good predictor of future returns, and the bonds in our Income Fund are yielding 4%.
As a reminder, bonds don’t have the same potential return as stocks but still provide an above-inflation yield and are good diversifiers when stocks are weak and negativity is rampant.
We would recommend that your personal asset mix be at, or below, its target for stocks. We strongly recommend sticking to a broadly diversified portfolio, however, as market predictions in the short term are notoriously unreliable.
If the Founders Fund is your primary holding, you’re following this advice. The fund has less exposure than usual to stocks (approximately 50%), while bonds (mostly government and high-quality corporate) account for 37% of the fund and short-term investments (cash) 14%. Founders still has plenty of exposure to benefit from rising markets but is also maintaining maximum flexibility for when market conditions aren’t as robust.
Investors drawing from their portfolio, including those enrolled in the Steadyhand Retirement Withdrawal Program, should top up their spending reserve. We recommend that investors have two years' worth of expenses set aside in the reserve (please contact us if you’d like to learn more.