Dai's Blog – 2018 Market Outlook

So with a rough start to 2018, I've had a number of people ask me where they should put their money. Here are my thoughts on general asset allocation for 2018.

Sectors:

Cash (30% allocation). Warren Buffet calls it a "indefinite call option on all other asset classes." Thus per option valuation, higher volatility in markets should translate to higher value of cash.
US Equities (10% allocation): Ever since the great money printing started in 2009, US equities have been propped up by a low rate regime. That is starting to turn as the fed is hiking rates. Inflation fears are rising and trade wars / isolationist policy only add fuel to the fire on higher prices. This is why managers are generally cautious on the equity market. The time value of money is the simplest and most important equation in finance and rates are the most important factor on asset valuation.
China (20% allocation): China continues to chug along at 6~7% GDP growth (vs ~2% in US) and the Chinese consumer tech scene continues to impress. I think BABA and Tencent are well positioned as the main customer portal from shopping to social to finance and value should continue to accrue to those two.
Rates / Credit (10% allocation) US Treasuries still don't offer much compelling value but if 10 year rates get closer to ~5% (currently ~3%), I would start allocating there. Floating rate corporate loans are L+ 200~300 and if defaults ticks up to 4~5% (historical ~2%) loss adjusted yields are 3~4% so not super attractive either. Most of my exposure is short duration in TSI and Doubleline.
Real Estate (10% allocation): Lower inventory levels and rising household formation should be beneficial for overall HPA across the US but select luxury markets could have difficulty with higher financing costs / lower tax deductibility / fewer foreign buyers.
Precious Metals/Bitcoin (5% allocation): Gold has been a laggard on returns for years but demonstrates good hedge value against big equity drawdowns. It's amazing how everyone has heard of bitcoin and the million other altcoins by now. I think a 1~2% allocation makes sense.
Alternatives / Opportunistic (15% allocation) Generally PE and illiquid investments.