Assuming you have a tolerance for risk and are taking a longterm perspective, the strongest returns would be generated with a diversified portfolio of small-cap stocks. Over the long term, it is small-cap stocks that offer the strongest returns. It is particularly timely to invest after a period of market weakness as we have recently experienced. This is the approach I have taken for the past 25 years with great success.

I’d buy a basket of six or seven of the highest-quality dividend-paying stocks that I can find in businesses that have been around for 50 or 100 years, through good markets and bad markets. It would be a basket that includes global champions, things like Procter & Gamble, Exxon Mobil, 3M. I would be buying U.S. stocks as opposed to Canadian stocks, because the businesses are better. I’d much rather own Walmart than Canadian Tire. I’d even throw in the odd European company, a Diageo and a Nestlé. When times are bad, people eat chocolate and drink booze.

With the kinds of uncertainties that have developed over the last number of months, risk-type assets look quite attractive again and investors can be compensated pretty nicely for investing in these assets. So [I’d invest in] things like equities, corporate debt and high-yield bonds. The risk premium is getting more and more attractive. Although one has to be mindful of the kinds of risks that one is prepared to take, by and large you’re getting quite well compensated for taking those risks, and we feel quite comfortable investing in a basket of those kinds of securities.

I’d put it in the U.S. It’s just that there are a lot of bargains, and the sentiment is so negative. It can get worse, and the prices can get cheaper, but prices are pretty attractive at these levels. I see the U.S. fixing its problems, and I see a lot of companies putting on better and better earnings. It’s a place that nobody wants to be, but that’s generally where you want to be when everybody else is afraid. This creates the opportunity. If you have a several-year view of the world, which investors are supposed to have, then this is where you want to be.

My favourite measuring stick for thorny investment problems is 500-year-old advice from [German banker] Jacob Fugger the Rich. He suggests that you divide your fortune in four equal parts: stocks, bonds, real estate and gold coins, and rebalance back whenever performance differences occur. Most investors have an existing investment in their homes, so real estate can be excluded. Thus, 33% in quality, high-yielding equities, 33% in fixed income with an emphasis on quality corporate bonds, and 33% in cash, T-bills and gold.

I would put that $100,000 in global large-cap stocks. The reason is that we have fairly high margins generally, and the valuation levels on larger capitalization stocks are lower. As such, you take less risk from reduced margins in the future, and you take less risk on valuation. If you’re young enough, I would say [100% equities] is not a bad bet. There’s the risk that we have very low inflation for a long time, which would translate into high performance for bonds [and] tougher performance for equities. But the low valuation and the high income should enable you to still do OK.

I would divide the money into two piles. The first one would go into a portfolio of high yielding securities. There are a lot of mutual funds who have products like this, including Bloom, Dundee, Sentry, Fidelity, among others. Some people think high dividend score is the fad of the day. I disagree. The second pile I would put into a fund that is less volatile but has great long-term revenue. Volatility is very out of favor, but I wouldn't be afraid.

I would recommend a portfolio weighted heavily toward dividend paying corporations. Commercial banks, railroads, telecommunication firms, electric utilities and pipeline companies are all good bets in somewhat uncertain markets. I would also recommend a bond fund or a series of well-chosen corporate bonds. While the yields have declined, this is a defensive sector that will cushion investors in turbulent markets. While the exact split between bonds, cash and equities will vary dramatically, an approximate split could be 63 per cent equities, 30 per cent bonds and 7 per cent cash.

We’ve got an overweight position in stocks with a bias towards basic materials, energy, technology and industrial sectors, as well as an underweight position in bonds, expecting that bond yields have to move higher at some point, thus pushing prices lower. Stocks are lower because investors are ignoring many of the positive factors that will push stocks higher over the next number of years, including the secular growth story going on in the emerging economies.