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Billionaire investor Howard Marks explains why he’s investing with ‘more caution than usual’ — and lays out a 3-part approach for surviving for the next meltdown

If you ask Howard Marks where he thinks the stock market will be a year from now, the answer you get will likely be unsatisfactory.

The billionaire co-founder of Oaktree Capital Management is staunchly against forecasting the future with any degree of certainty as part of his investment process. But one thing he’s confident about is that investors should be exercising more caution than aggression right now, according to a recent interview published by the Swiss newspaper NZZ News.

Oaktree has been employing a more guarded approach to investing for a few years now, Marks said.

“What this means is we are essentially fully invested in most of our funds and accounts, but we are using even more caution than usual,” Marks said.

He doesn’t see full-blown euphoria when he surveys the rest of the investing landscape. For that to be in place, hordes of investors would need to be buying out of the belief that nothing can go wrong, he said.

What has him cautious instead is the growing level of comfort that investors have with risk-taking. In a world starved of yield, institutional investors like pension funds have had to reach further into the risk spectrum to meet their clients’ expectations.

And no asset class is more troubling to Marks than credit.

In a memo to clients last September, he pinpointed debt as the “ground zero when things next go wrong.” He specifically flagged Argentina’s issuance of a 100-year government bond, and the large share of companies with BBB-rated bonds, as examples of the desperate hunt for yield.

Read more: There’s glaring evidence that the next recession will be different from any other in recent history. Here’s why experts worry we’re ill-prepared to end it

For those skeptical of Marks’ concerns, consider that he’s no novice to the debt markets. In the depths of the 2008 crisis, Marks and his team did their due diligence and amassed a $10 billion position in distressed corporate debt. He made his bets — and reaped the profits — in the opposite of the climate that prevails today.

Now that the credit market is coming full cycle, Marks is warning of the dangers that lie ahead. For example, if inflation spiked, the Fed would raise interest rates in response and crush companies with too much debt.

He’s not forecasting another 2008-style crisis, nor is he advising investors to sell everything. But he does want investors to be very mindful of their risk-taking despite the low returns in safer assets.

With that established, here’s Marks’ three part answer to how investors should be adjusting their portfolios:

  1. Go to cash. He added, however, that this would be an extreme move that could prove costly. After all, the strongest gains in the stock market are often reaped in the bull market’s final stages.
  2. Shift your asset allocation preferences to bonds over stocks, high-grade bonds over low-grade bonds, large companies over small companies, and defensives over cyclicals.
  3. Shift to safer and more defensive assets within what you already own.

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