A strong case can be made for increasing exposure to the stock market — and just as strong a case can be made for remaining on the sidelines. On one hand, corporate balance sheets are in better shape than they have been for decades and valuations appear reasonable. On the other, one can easily argue that we remain in the midst of a secular bear market, which is often marked by brief but intense run-ups in stocks. To get a better perspective on whether now is the time to be in — or out — of stocks, we went to a bull and a bear and asked each to offer his idea of a model portfolio for a client with a moderate appetite for risk.
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The S&P 500 was up 8.5% year-to-date through March 6 and has risen 35.5% over the past three years. But that hasn't stopped Lee Munson, principal at Portfolio LLC, from positioning his client portfolios for an even bigger run-up in stocks.
About a year ago, he added a 10% overweight to equities in clients' moderate portfolios, which are historically the classic 60/40 mix of stocks and bonds. They are now allocated 70% to stocks and 30% to bonds.
Mr. Munson has no plans to alter the strategy, as he thinks stocks have more opportunity because of their earnings power.
“Corporate profits are 30% higher today than they were at the market peak in 2007,” he said. “If we re-priced the market today on a comparative level, the S&P would be at almost 1,700.”
Mr. Munson isn't predicting that the market's price-earnings ratio will rise from its present level of 14 to the historical average of 15, but he sees room in that gap for stock returns to continue outpacing other asset classes.
“The best thing that can happen is for people to remain scared and stay in cash,” he said. “It leaves more for my clients to eat.”
In addition to U.S. stocks, Mr. Munson's clients hold a 13% allocation to emerging-markets small-caps through the $1.37 billion Wisdom-Tree Emerging Markets Small Cap Dividend ETF (DGS).
The exchange-traded fund's focus on small-cap, high-dividend-paying companies gives it less exposure to China than larger-cap emerging-markets ETFs, an effect that Mr. Munson likes.
Mr. Munson has the majority of the portfolio's bond assets in investment-grade debt, overweighted in corporate bonds.
He isn't worried about valuations or interest rate risk at the moment. Instead, the holdings are there for protection from falling equities and the overzealous.
“Just because diversification is expensive on the bond side doesn't mean you give it up,” Mr. Munson said. “Plus, you can blow off a bear at cocktail parties by telling them you own Treasuries.”
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