Hoist the Anchor and Diversify to Non-Dollar Assets

Prudent investors should shift their perspectives and double-check their portfolio diversification. The game has changed after more than a decade of the S&P 500 dominating global equity markets and the U.S. dollar surging over 50% against major trading partners.

That booming success prompted many investors to anchor their strategies based on the past 15 years of history. However, U.S. financial assets—stocks, bonds, currency—are highly unlikely to outperform to the same degree in coming years. U.S. Treasury bonds and the dollar are also unlikely to provide the exceptional level of “safe haven” status that they achieved after the Great Financial Crisis in 2008/2009.

Here’s why: Following the crisis, when compared to many other countries, U.S. fiscal and monetary policies proved more conducive to economic growth. At home, policymakers basically focused on slow and steady growth, low inflation and achieving full employment. Abroad, many economies stagnated because their fiscal and monetary policies were less effective in producing economic growth. The disparity between the U.S. and the rest of the world allowed the U.S. stock market and currency to soar on both an absolute and relative basis.

Today, America’s fiscal health has deteriorated, and domestic monetary policy is relatively constrained by more persistent inflation concerns. In contrast, many countries and regions that have struggled since 2009 are on sounder footing, allowing both fiscal and monetary policy to contribute more effectively to growth.

Bottom line: Disciplined investing often requires an objective viewpoint to avoid anchoring to the past, a bias that can cause one to miss important shifts in the global macroeconomy and financial markets. Going forward, investors should consider increasing holdings in non-dollar assets—natural resources, precious metals, foreign stocks and bonds—relative to allocations they might have favored for the past fifteen years.