THE 33-33-33 PORTFOLIO

For decades, a 60/40 (60 percent stock, 40 percent bond) investment portfolio has been encouraged by financial advisors. However, we live in a new world, so in recent years a 33/33/33 allocation has been suggested, with investments divided equally among stocks, bonds, and alternatives. This shift in portfolio strategy is the result of unsustainable stock prices, looming inflation, and expected higher interest rates.  

The alternative investments include assets such as venture capital, real estate, private equity, private debt, commodities, and cryptocurrencies. These asset categories offer investors enhanced diversification, and have a low correlation with stocks to provide an inflation hedge. 

Real estate offers an opportunity for an improved yield for investors with a lower risk tolerance. Venture capital and private equity are suggested for investors comfortable with more risk.

Recent J.P. Morgan research revealed that an allocation of 30 percent of these alternatives can substantially increase annual returns, while strengthening portfolio stability and decreasing risk. However, these illiquid assets can’t be quickly sold, or liquidated, so careful cash-flow planning is also necessary.

Remember, every portfolio must be personalized to the needs of the individual based on liquidity need, risk tolerance, and the time horizon of financial goals.

For additional information on the 33/33/33 portfolio, go to the following articles.

Article #1

Article #2

Teaching Suggestions

  • Have students research alternative investments (venture capital, real estate, private equity, private debt, commodities, cryptocurrencies) to determine recent returns, risk, and suitability for their personal portfolio.
  • Have students create a visual proposal or video with a suggested investment portfolio for their current or future situation.

Discussion Questions 

  1. What factors should a person consider when planning an investment portfolio?
  2. Describe actions a person might take to determine if alternative investments are appropriate for their financial situation. 

Bonds and Interest Rates

“Interest rate changes are among the most significant factors affecting bond return.”

When it comes to how interest rates affect bond prices, there are three cardinal rules.

  1. When interest rates rise–bond prices generally fall.
  2. When interest rates fall–bond prices generally rise.
  3. Every bond carries interest rate risk.

This article describes how each of the “3 cardinal rules” described above affects a bond investment.  It also explains the role the Federal Reserve plays in determining interest rates in the economy.  Specifically it describes the federal funds rate, the discount rate, and basis points for bond investments.

Finally, this article provides information on where to find economic indicators that measure not only changes in interest rates but also other economic indicators for the nation’s economy.

For more information, click here. 

Teaching Suggestions

You may want to use the information in this blog post and the original article to

  • Review why investors choose bonds for their investment portfolio.
  • Explain how the three cardinal rules described in this article affect a bond’s value.

Discussion Questions

  1. Assume you are 35 years old, married, and earn $85,000 a year. In what circumstances would bonds be a good choice for your investment portfolio?  In what circumstances would bonds be a poor choice?
  2. What happens to a bond’s price if interest rates in the economy increase? If interest rates in the economy decrease?
  3. In addition to interest rates, what other factors that could affect the value of a bond?

Apple Returns to Bond Market

Investors flock to Apple’s $12 billion debt offering.

The demand for Apple’s new bond issues with maturities ranging from three to thirty years and rated double-A-plus, the second highest rating, reflects a corporate-debt market that is putting in a surprisingly strong performance this year.  The rate for Apple’s 3-year bonds was 1.068 percent; the rate for 30-year bonds was 4.483 percent–about 1 percent more than U.S. Treasury securities.

Although Apple has a healthy cash pile, about $150 billion, it chose to issue bonds to pay for expanding its stock buyback program and increasing its dividend to stockholders. According to many experts, the fact that Apple has such a large cash surplus and is currently the most valuable U.S. firm based on stock-market value helped assure bond buyers that there is little risk in Apple bonds.

For more information go to

http://online.wsj.com/news/articles/SB10001424052702304393704579531591100806848#printMode

Teaching Suggestions

You may want to use the information in this blog post and the original article to

  • Remind students that once a bond is issued, the price can increase or decrease because of the inverse relationship between a bond’s price and overall interest rates in the economy.  (Higher interest rates in the economy = lower prices for existing bonds; and, lower interest rates in the economy = higher prices for existing bonds.)
  • Explore different reasons why Apple chose to issue bonds instead of using some of its cash surplus.  (Reasons include taxation of cash held in off-shore accounts and financial leverage.)

Discussion Questions

  1. Apple chose to sell bonds to fund its share buyback program and increase dividends to stockholders.  What are the advantages of selling bonds instead of using part of its cash surplus?
  2. Why would a short-term bond pay lower interest than a long-term bond?
  3. Given your current age and financial situation, would you invest in Apple corporate bonds?  Why?