Asset Allocation
Name
Institution
Author Note
Asset Allocation
General Economic Conditions of US Macro Economy
The key economic indicator reveals that the US economy is steady. The economy is projected to grow at a softer pace in 2020. The business investment and the fading fiscal stimulus will dampen growth, while the additional downside risk emanates from the effects of lingering trade tensions, the corona outbreak, and the subdued global panorama. However, the lower borrowing costs and the solid consumer dynamics costs will cushion deceleration. In 2019, the gross domestic product rose to 2.1% in the 4th. The U.S. Bureau of Economic Analysis indicates that the account deficit declined by 12.4 percent or 15.6 billion dollars to 109.8 billion dollars in 2019 (“FRED,” 2020).
From the economic analysis, it is clear that the incomes and wages continue to stagnate as many Americans struggle to maintain their living standards (“U.S. Bureau of Economic Analysis (BEA),” 2020). There is a widening gap between the numbers of Americans, earning low wages when compared to others in developed nations. The current economic expansion, initiated by the government, has brought a limited boost to capital investment, innovation, and productivity. The broad-based underperformance calls for more progressive and proactive economic policies to avoid future financial crises, stimulate investment, and end wage stagnation. The general government policies, which consist of deregulation and targeted tax cuts, have had little effect on shared prosperity.
Despite the challenges, the US economy keeps holding leading status because of numerous characteristics. The country has a decent physical infrastructure and natural resources. Also, it has a productive and well-educated workforce. The government has continued to offer a regulatory framework, an effective legal system, and political steadiness that allow the economy to prosper. The GDP in the US is constantly being stimulated by ongoing research, development, and capital investment.
Economic Conditions and Risks
The economy is currently evolving from the period of a slump. Numerous features, including lax government regulations and lows interest rates, have contributed to the risk. The trade wars, global economic slowdown, and a pullback in consumer spending are all likely to slow down the overall economic growth in 2020 (“United States Rates & Bonds,” 2020). Besides, the rise in the nationalist and populist movement across the globe, strained relations with the US, and the protest movements in various nations, such as Chile and Iran, could further disrupt economic growth.
Recommendations
Allocation
Cash- 30%
US 30-Year Treasury Bonds- 40%
US Equities- 30%
US Equities- 30%
The US equities have had one of the best bull runs over the years. The S&P and NASDAQ are touching all-time highs (“S&P 500”, 2020). Also, the economy has recovered from the economic recession. The high appreciation in the stock values is more likely because of the improving economy. In view of the promising prospects, the allocation should be trimmed to 30 percent.
30 Year Treasury Bonds – 40%
Based on any economic projection, financial analysis is critical before making any long term investment plans (Houwelin & Van Zundert, 2017). Through critical comparative analysis, 30-year treasury bonds pay a higher interest rate compared to the short term bonds to compensate for the risks. Investing 40 percent of the fund on the bond is likely to generate high returns. The bond prices and the interest rate are inversely related. The higher the bond prices, the low the interest rates and vice versa. The phenomena are more clearly when based on long term projector (for instance, 30 years). The interest rate on the long-term bonds is likely to be higher, creating a suitable investment opportunity in the long run. Based on a critical analysis of the relationship between bond prices and interest rates, allocation of 40% is likely to yield a higher return in the future.
Cash – 30%
In financial investment analysis, cash investments are categorized as short term obligations that offer returns in terms of interest repayment. One of the major characteristics of cash investment is the low level of risk involved compared to treasurer bonds and equities investment (Israel, Palhares & Richardson, 2017). However, cash investments provide a lower return and a lower risk when compared to the two bonds. The investor can benefit from the high liquidity of cash investments. The 30 percent cash will be allocated in a structured manner in the shares that seem to be undervalued.
References
FRED. Research.stlouisfed.org. (2020). Retrieved from http://research.stlouisfed.org/fred2/.
Houweling, P., & Van Zundert, J. (2017). Factor investing in the corporate bond market. Financial Analysts Journal, 73(2), 100-115.
Israel, R., Palhares, D., & Richardson, S. A. (2017). Common factors in corporate bond returns. Forthcoming in the Journal of Investment Management.
S&P 500. Finance.yahoo.com. (2020). Retrieved from http://finance.yahoo.com/q?s=%5EGSPC.
U.S. Bureau of Economic Analysis (BEA). Bea.gov. (2020). Retrieved from https://www.bea.gov/.
United States Rates & Bonds. Bloomberg.com. (2020). Retrieved from https://www.bloomberg.com/markets.