We have three strategic asset allocation models, based on risk-tolerance levels: Conservative, Moderate, and Aggressive. We make regular tactical adjustments to the models, based on our outlooks for the capital markets. January was a solid month for equity investors, as the S&P 500 advanced 1.6%, compared to a 0.1% increase for the fixed-income benchmark ETF AGG. From an asset-allocation standpoint, our Stock-Bond Barometer model slightly favors stocks over bonds for long-term portfolios, in light of the recent sharp decline in bond yields. Drilling down into equities, we are over-weight on large-caps. We favor large-caps for growth exposure and financial strength, while small-caps are selling at historical discounts relative to large-caps and offer value. Moving to the international arena, U.S. stocks have outperformed global stocks over the trailing one- and five-year periods. In terms of growth versus value, we anticipate that over the long term, growth, led by the Tech, Consumer, and Healthcare sectors, will top returns from value, led by Energy, Real Estate, and Materials, due to favorable secular and demographic trends. As for the fixed-income segment of a portfolio, we break bonds into four areas: Core, such as the industry benchmark ETF AGG or Treasuries; Inflation-Indexed; Opportunistic, such as securitized debt, corporate debt, high-yield or floating bonds; and Cash. Of these, we are focused on Core and Opportunistic. On duration, we recommend a shorter term. Last are Alternatives. Given the early stage of the current bull market, we think Alternatives are less desirable in the growth portion of our asset-allocation models. Our recommended weighting is 0%-2%.
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