Adding to the uncertainty is the U.S. Federal Reserve’s forecast of two more interest rate hikes and growing recession fears.
So if you had $50,000 to invest, where should you put it and how much should you allocate to each asset class? CNBC Pro spoke to portfolio managers and investors to find out.
Asset allocationJay Hatfield, CEO and portfolio manager at Infrastructure Capital Advisors, said he’d stick to the traditional 60% allocation to stocks, specifically: 5% to Nvidia; 5% to Microsoft; 10% to large-cap dividend stocks; 20% to the Invesco QQQ Trust Series 1 ETF; 10% to small-cap stocks; and 10% to the SPDR S&P 500 ETF.
“The allocation to large cap dividend stocks also increases income and the investment in small cap equities and SPY provides diversification if tech starts to lag the market,” he said.
The allocation of Ryan Pannell, CEO of U.S. asset manager Kaiju, is a little different. He recommends the following: 35% to Invesco QQQ Trust Series 1 ETF; 25% to options trades; 15% to SPDR S&P 500 ETF; 15% to ProShares UltraPro Short QQQ ETF; 5% to iShares Russell 2000 ETF; and 5% cash.
He added that he would look to cash in on artificial intelligence via the Invesco QQQ Trust Series 1 ETF.
“AI is here, it’s booming, and between tech companies achieving new levels of profitable efficiency via the direct use of AI, semis blowing up huge due to endless demand, and novel AI companies themselves moving into the index, diversified tech is a strong bet,” he said.
Victor Kuoch, director at Natixis IM Solutions (Asia-Pacific), allocates 40% of his portfolio to stocks; 35% to bonds (mostly U.S. government bonds); 15% to options-based strategies and gold; and 10% to cash.
He broke down his 40% (or $20,000) stock allocation this way: $10,000 into U.S. stocks, $5,000 into Europe, and $5,000 into Asian emerging market stocks.
[It] seems reasonable to be able to capture some upsides in the equity markets with a limited exposure should the economic slowdown hits stronger than expected,” he said. “Growth stocks like Tech should be well positioned now that we’re coming to an end of the hiking rate cycle after a difficult 2022.”
He said European stocks should be a “nice diversifier” as the region’s banks are “much better” capitalized than their U.S. counterparts. Though China’s reopening hasn’t brought the expected boost to Asia, he still predicts it will be a growth “trigger” for the region’s economy.
Options tradingA few strategists recommended options trading, with Kuoch saying that options-based strategies can benefit from both the long and short sides of the market.
Options allow you to bet on whether you think an asset is going up or down. You can buy or sell options contracts and implement various strategies. Buying a “put option” is profitable for an investor if the market goes down. Conversely, buying a “call option” pays if the market goes up. It can be a risky way to invest —here’s how it works.
Kuoch and Pannell said they would allocate 15% and 25%, respectively, into options.
Pannell would put it into S&P Iron Condors — an options strategy in which the investor typically buys both put and call options but at slightly different times and price targets. The strategy allows investors to profit if the market doesn’t go up or down, but rather remains range-bound.
Wade Guenther, partner at asset manager Wilshire Phoenix, said: “Uncertainty may mean elevated levels of volatility to some investors. Deploying covered call options on applicable portfolio holdings may help generate additional income.”
“Retaining call premium has the potential to help reduce some of the downside price movement often experienced during higher U.S. equity market volatility periods,” he added.
Hedge against volatilityPannell, who would have a 15% hedge reserve for the ProShares UltraPro Short QQQ ETF, said investors need some downside coverage.
“If the market suddenly shifts downwards (say an American plane collides with a Chinese plane off Taiwan), the most likely sector to take an immediate beating is unfortunately the one you’re riding on the way up (tech),” he said.
He says the ETF is triple leveraged, meaning that if markets tumble, they can allocate a little to it at a time — instead of immediately exiting other positions.
“The greater the slide, the more of the 15% gets allocated here, as other positions are reduced,” he said.
TreasuriesRaymond Bridges, portfolio manager at Bridges Capital, who has 90% of his portfolio invested in short-term Treasurys, said this will remain until “equities realize a repricing in valuation, making them more attractive on a relative basis or the yield-curve normalizes and the Fed makes it clear that the inflation fight is actually over.”
He invests the remaining 10% of his portfolio in large-cap tech, energy and consumer staple stocks.
— CNBC’s Ganesh Rao contributed to this report.
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