How to Anchor Your Portfolio as theStock Market Boom Goes Bust
For the first time in more than eight years, I'm reducing my stock exposure in favor of alternative investments. My favorite alternatives include the Japanese yen, agricultural commodities and bear market funds. But just because I've grown very cautious about the next 24 months doesn't mean I've exited from the market entirely. And neither should you.Over the last six months, I've reduced or liquidated most of my sector and country fund bets in favor of diversified global stock funds employing a value bias. Yes, these funds are getting hit hard this month because stocks are getting bruised. But I'm covering these positions with a hefty sum of cash, the yen, gold and alternative investments. And all my alternative investments have a negative correlation to the market. This strategy is really shining this month, in the worst January since 1991 for global equities. With markets down 6% in January, my portfolios are about flat - and I'll take flat in this muck. When the going gets tough and markets are poised to change direction in a big way, I sell the riskiest equity funds in my portfolio and beef-up my global equity fund positions. Global mutual funds are diversified behemoths that invest worldwide across currencies and asset classes. They invest mostly in large-cap stocks. What's great about this strategy is that it allows you to concentrate on the big macro picture, but you don't have speculative positions to your portfolio. In other words, I want to maintain some broad equity exposure in all markets, yet I don't want to be subjected to the extraordinary volatility associated with emerging markets or small-caps at this stage of the economic cycle. Right now, I don't want exposure to China or any other single-country market directly. Instead, I prefer to own many of these markets through a diversified global fund where the risk is much less.The biggest challenge over the next 24 months will be how to protect capital ahead of the worst bear market since 2000-2002 and possibly, 1973-1974. A major profits recession is underway. But apparently Wall Street hasn't noticed. They're still estimating bullish earnings despite the fact that the economy is mired by a major credit crisis, shrinking profit margins, surging energy prices and slower domestic consumption. Plus, another brick is about to fall as securitization woes in auto loans and other consumer credit securities start to come under pressure this year.The good news? I don't think the market has much more to fall in this correction or bear market. A rally will ensue eventually and then we could see new lows again later this spring or summer. That'll be the opportunity to "get out and dodge" and unload risky securities as stocks post an intermittent advance. Basically, I think most bull markets around the world are either dead or dying a slow death in 2008. I don't see them reigniting until 2010, at the earliest, following dramatic interest rate cuts by global central banks.
For the first time in more than eight years, I'm reducing my stock exposure in favor of alternative investments. My favorite alternatives include the Japanese yen, agricultural commodities and bear market funds. But just because I've grown very cautious about the next 24 months doesn't mean I've exited from the market entirely. And neither should you.Over the last six months, I've reduced or liquidated most of my sector and country fund bets in favor of diversified global stock funds employing a value bias. Yes, these funds are getting hit hard this month because stocks are getting bruised. But I'm covering these positions with a hefty sum of cash, the yen, gold and alternative investments. And all my alternative investments have a negative correlation to the market. This strategy is really shining this month, in the worst January since 1991 for global equities. With markets down 6% in January, my portfolios are about flat - and I'll take flat in this muck. When the going gets tough and markets are poised to change direction in a big way, I sell the riskiest equity funds in my portfolio and beef-up my global equity fund positions. Global mutual funds are diversified behemoths that invest worldwide across currencies and asset classes. They invest mostly in large-cap stocks. What's great about this strategy is that it allows you to concentrate on the big macro picture, but you don't have speculative positions to your portfolio. In other words, I want to maintain some broad equity exposure in all markets, yet I don't want to be subjected to the extraordinary volatility associated with emerging markets or small-caps at this stage of the economic cycle. Right now, I don't want exposure to China or any other single-country market directly. Instead, I prefer to own many of these markets through a diversified global fund where the risk is much less.The biggest challenge over the next 24 months will be how to protect capital ahead of the worst bear market since 2000-2002 and possibly, 1973-1974. A major profits recession is underway. But apparently Wall Street hasn't noticed. They're still estimating bullish earnings despite the fact that the economy is mired by a major credit crisis, shrinking profit margins, surging energy prices and slower domestic consumption. Plus, another brick is about to fall as securitization woes in auto loans and other consumer credit securities start to come under pressure this year.The good news? I don't think the market has much more to fall in this correction or bear market. A rally will ensue eventually and then we could see new lows again later this spring or summer. That'll be the opportunity to "get out and dodge" and unload risky securities as stocks post an intermittent advance. Basically, I think most bull markets around the world are either dead or dying a slow death in 2008. I don't see them reigniting until 2010, at the earliest, following dramatic interest rate cuts by global central banks.
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