Investor fear, the shock of social isolation, and uncertainty have pummeled markets in recent weeks. It is also unclear how long lasting the effects of the crisis might be. If this results in a full recession, the results could be more long lasting.
Now that markets are at multi-year lows, what should you invest in?
Nobody knows what will happen, so my advice is to stick to the global portfolio. There are many ways to build a global portfolio, but I reccomend a simple approach with a US stock fund and a global stock fund that omits the US. Two such funds are VTI and VXUS from Vanguard. However, there are compelling offerings from most legitimate ETF shops such as iShares, State Street, and Schwab.
I believe you should purchase between 30 and 50 percent international and the rest US stock. There is nothing wrong with biasing toward your home country, but the risk of underperformance in the future is a good reason to diversify globally.
Of course, you can also purchase bonds and hold cash in your portfolio, but right now, many bonds are less attractive than stocks, with several notable exceptions such as emerging market sovereign bonds which have taken a large hit (EMB and PCY are two interesting emerging market bond ETFs).
Right now, one of the best cushions to your portfolio is to hold cash, and my suggestion would be to hold cash in your portfolio in place of bonds for now.
Weighting to Emerging Markets?
I personally weight my portfolio to emerging markets because they trade at cheaper valuations and pay good dividends, even though they also suffer from higher volatility. This is a worthy trade-off in my mind, however. Currently, my ETFs of choice are SCHE from schwab and VWO from Vanguard. I also like to invest in some emerging market bonds. My ETF of choice is PCY. As an equal weighted fund, PCY limits its exposure to any individual country in return for only a minor increase in cost to its peers, such as EMB.
In the end, I buy every month. The market drop doesn’t change my opinion about investing. It may delay certain goals in the short term but I have confidence in the long term.
Disclosure: I own shares of most of the funds mentioned in this article.