Chief investment officer on creating an ‘all-weather portfolio’

Chief investment officer on creating an 'all-weather portfolio'

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  • Stocks slumped on Tuesday after inflation data came in hotter than expected.
  • Investor Phillip Toews transferred 90% of his assets to cash before the crash.
  • Toews told Insider how to create an “all-weather portfolio” that can withstand the latest recession.

Investors are once again worried after the August inflation report showed prices rose at a faster rate than economists expected.

The 8.3% inflation figure released on Tuesday led to a sharp and immediate stock market sell-off, with the S&P 500 plummeting 4.3%.

The benchmark is now close to slipping back into a bear market, having fallen 17.7% so far this year, while many analysts believe it is poised to drop back to the lows it hit in June.

The higher-than-expected inflation print dashes markets’ last hopes of a year-end rally, according to the chairman of Toews Asset Management. High inflation increases the likelihood that the Federal Reserve will raise interest rates aggressively to combat rising prices.

“A favorable inflation number and continued gains in Ukraine could have led to a very decent short-term rally,” Phillip Toews, whose firm manages $2.2 billion worth of assets, told Insider in a recent interview. “But if you step back and look for six or 12 months, we think this bear market will break through the June lows and then go lower.”

Toews put almost all of his assets in cash before Tuesday’s accident. He shared how investors can build a portfolio that is strong enough to withstand a bear market and why he prefers the US dollar to stocks and bonds right now.

‘All Weather Wallet’

Toews said investors tend to underestimate the likelihood of a stock market crash, meaning they overweight their portfolio toward riskier stocks that offer greater upside.

“Instead of always assuming things will be okay, it’s important to look back at past accidents,” Toews said. “I always approach the markets recognizing that some of the worst scenarios could happen.”

“Strong wallets have built-in contingency plans, that’s what makes them all-weather wallets,” he added.

As part of that all-weather approach, Toews advised carefully buying some low-volatility stocks. Defensive sectors like utilities, consumer staples, and health care tend to offer investors more stable returns during periods of high inflation and low economic growth.

Toews is taking an even more cautious approach to investing in fixed income. Global bonds plunged into their first bear market in more than three decades earlier this month as investors dumped existing bonds offering lower yields.

“Bonds are going to be killed,” Toews said. “It’s very important for investors to have places they can go to avoid losses right now.”

cash is king

For Toews, whose investment approach is driven by computer algorithms and long-term trends, the best route to avoid those losses has been to turn to cash.

By Friday, his company had shifted most of its assets into cash, after withdrawing nearly all of its money from the markets in May ahead of the June bear market.

“We were driven out of stocks by trend-following algorithms,” Toews told Insider. “We came back into the markets several months ago, enjoyed the rally, but then got out before things got worse again.”

Although a period of high inflation generally devalues ​​a currency, Toews’ big bet on cash has turned a profit this year.

The Fed has raised interest rates more aggressively than other central banks, attracting foreign investment and boosting the dollar.

The US dollar index, which tracks the dollar’s performance against a basket of international currencies, is up 13.8% so far this year. It has far outperformed the S&P 500, which has fallen nearly 18% over the same period.

“Market commentators talk about buying the dip, but at times like these you don’t want to be trying to make market calls and time the market,” Toews said. “Being on the sidelines, you can patiently wait for the markets to turn.”

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