What a week. It’s a bit ironic that Cash Chronicles was watching the drama unfold from Argentina, a country that experienced 2 sovereign defaults, inflation and protectionism for the last 15 years and is only just now emerging from the madness with a new business friendly government actively engaging the world again. A protectionist, populist, crisis inducing government may be what we have to look forward to here in the US if Trump keeps all his campaign promises.

However any of us feel about the outcome of the election though, we have choices with our money just like at any other time. The market dropped after the election but has recovered, similar to how markets reacted to Brexit; the news of uncertainty and then a realization that uncertainty does not mean there is an immediate downside, but the specter is looming over markets. With the run up in the stock market since 2009 and bond yields at historic lows this is a strange time for investors in terms of where to put new money.

This is where diversification comes in though, however much many of us may be looking at the market thinking US stocks, bonds, cash or gold are the only options, there are a number of other economies that are at completely different phases of their economic cycles that offer opportunities for US investors.

Some Options Abroad

Take for example the IMF’s projections of the fastest growing economies for 2017. India is expected to overtake China as the fastest growing large economy next year. If you are willing to take the local currency risk, growth always means appreciation against the dollar in the long term. Not too bad when it comes to bonds that have a 6.7% yield on their 10 year note. Although the US is their top export market and they may be hurt by a trade war with the US, India has export markets throughout Asia that are not as closely linked to the US and can provide some hedge.

Brazil is coming out of a recession, reports on the ground in the region suggest that banks are lending again and the currency is expected to start to appreciate again. This may be the time to get in, especially since the recovery story has not hit the international press and China is their largest export market, with the US coming in second. 12% interest rates on 10 year government bonds and the potential for an increasing stock market in the coming years make this an attractive option despite the political turmoil that the country has experienced in the past few years. In terms of private companies, you can never go wrong with Itau Unibanco; the bank is a market leader and has recently become a regional player, snapping up banks in Chile and Colombia. Itau also has shares listed on the NYSE, making investing easier for anyone from the US that wants to get in.

There can even be a contrarian argument made for Mexico. A Trump administration could be a potential disaster for the country but if it turns out to be not as bad as some have expected, government bonds and stocks will have looked cheap after the peso took a dive following the election. The peso fell by 13.4% in the days following the election and many analysts are predicting it will fall even further before he takes office. At 7.2%, 10 year bonds may see some price appreciation locally if the central bank decides to cut interest rates in light of the market turmoil. Mexico still remains home to some world class companies such as Grupo Bimbo or America Movil which have the market dominance to whether any medium term crisis and international operations that can act as a hedge to a weak peso.

For The Cautious and Conservative

Let’s be honest though, most of us will not wade into these waters because we don’t have much expertise in those countries. You are taking on currency risk, sovereign risk in the case of a sovereign bond and all those as well as the risk of the company you are investing in if you choose an individual stock. An easier route is to keep your money domestic but chose a diversified ETF in order to spread your risk. Here I have some suggestions too.

For the cautious and risk averse in terms of stocks I have four recommendations. I believe the first step in building a portfolio is capturing the entire market. The core of my portfolio is always an ETF that is a reflection of my entire home market and then of the world market. You can find these in the Vanguard ETF’s VTI and VT. VTI is an ETF that seeks to capture the entire stock market of the US, the index which it mirrors is called the CRSP U.S. Total Market Index. CRSP stands for Center for Research in Security Prices of the University of Chicago School of Business. It holds about 3600 shares across mega, large and micro capitalizations representing nearly 100% of the entire US investible equity market. There is no listed company in the US that will get away with you on this one.

Another option in basic portfolio terms, is the Vanguard Total World Stock ETF (VT). This ETF seeks to capture the performance of the FTSE Global All Cap Index. It currently holds 7649 of stocks which is supposed to represent the performance of all the world’s stock markets combined.

A word of caution here though, North America is heavily over-represented when you have an index that tries to diversify throughout the world in terms of market cap. North America currently represents 55.9% of the entire portfolio in VT, so there will be a lot of overlap in terms of stocks with VT and VTI. In fact the 10 largest holdings of the 2 ETF’s are pretty much the same. As an alternative, Vanguard offers another ETF, VXUS which represents the world stock market excluding the US. Although the downside of this is that it is heavily weighted towards Europe, which represents 43.3% of the portfolio. I will leave it up to each investor to determine how they should mix and match these ETF’s based on your own assumptions of where some of the world’s markets are headed. It is also worth noting that many US domestic companies have already diversified overseas so investing in VTI doesn’t mean you are investing solely in the US itself, it is estimated that in 2014 33% of revenues by S&P 500 companies were from overseas. However keep in mind that VTI includes many small cap and micro-cap stocks which may be entirely US focused so my assumption would be that it is more US focused than the S&P 500.

Vanguard also offers a number of sector ETF’s, but I feel there is really only one that is worth mentioning for long term investors. That is VDC which is the consumer staples ETF. Take a look here from a blog post in 2011 describing the long term potential of the sector:

Jim O’Shaughnessy of O’Shaughnessy Asset Management and author of “What Works on Wall Street” performed a sector analysis of the stock market over a four decade period. He appeared on CNBC recently and revealed the results of his analysis.

According to O’Shaughnessy, the highest return long-term sector has been consumer staples……

Here’s a couple of his findings:

– Not only did consumer staples do the best among 10 sectors, the highest performing stocks in the consumer staples sector had the highest buybacks plus dividend yield (shareholder yield).

– Those with the highest shareholder yield had an average annual return of 17.8%.

So they have worked very well as an “offense” long-term, despite their reputation, and produced above market returns.

Consistent with their reputation, they have also worked as a pretty good defense.

Higher returns…lower risk

A quick look at just the price performance of VDC vs. the S&P 500 (not including reinvested dividends, which makes it perform even greater) confirms these findings over the last 10 years.

In the long run this makes sense; downturns may come and go but certain products we always have to buy: soap, food stuffs, cleaning products etc. These companies specialize in all these products we take as boring and mundane but in the long run they provide less volatility with higher returns that the rest of the market. The only complaint I have about this particular ETF is that it is only focused on US companies. The top holdings are companies like Proctor and Gamble, PepsiCo and Wal-Mart. There is no international consumer staple stock provided by Vanguard which means in order to capture this sector on a global scale you will have to venture outside of the Vanguard realm to more expensive ETF’s in terms of fees. I found this in iShares KXI which is the international consumer staples ETF. Here the largest holdings include the ones I mentioned but also include companies like Nestle, Unilever and Diageo. You can bet that if someone, somewhere in the world is washing up, having a snack or having a drink at the bar, they are using a product from one of these companies.

Finally I could write a whole other article on bonds but I will keep it simple. Besides municipal bond ETF’s to avoid taxes, if I could recommend one bond portfolio in one I would have to recommend the long term corporate bond ETF, VCLT. This is focused on long term corporate bonds issued by investment grade US companies. I would love to recommend an international corporate bond ETF but the ones I have seen either do not offer longer terms, have an ex-US strategy or are too illiquid to make me comfortable. I would also advise being cautious here too; interest rates are set to rise in the US in December so this ETF may get hammered. I am recommending it here as a long term strategy ETF for the sector not as an investment for the next 2-12 months. Investment grade bonds provide a pickup in terms of return over the long haul that beats those of high yield and government bonds which is why I recommend this particular ETF.

Conclusion

I know there are a lot of faddish opinions on where you can put your money if the world goes to hell or about the next hot tip. In addition to cash, I think holding some combination of the ETF’s I have mentioned will at least preserve your wealth if not grow it over the long term, no matter how bad things get. Let the day to day markets move where they may and the politics as well but the best we can all hope for in terms of our money is to diversify globally as well as asset wise in order to survive the rough patches that may be to come.

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