Living on the beautiful coast of South Carolina comes with similar risk/reward attributes as investing in stocks: There is always risk of tropical storms and hurricanes, which are cyclical in nature, with a "major storm" occurrence approximately once every five to seven years and at least one "catastrophic" storm once per generation (every 20 to 30 years). The "rewards," of course, of living on the southeastern coast are the mild temperatures, beautiful beaches and the comfortable, high quality of living.
After the big storms come and go, most of us do not reflect upon what we have lost but choose, instead, to focus on what we still possess -- all of which has nothing to do with money, material wealth or social status -- it is health, family, a tremendous sense of community and giving, colored with shades of hope -- all driving us forward.
In terms of our material loss, the big storms bring the opportunity, necessity and desire to "rebuild stronger than before." Invariably, some homeowners will sell and move away; some will rebuild, hold on and stay; some will buy houses or land at depressed prices; and the few and unfortunate will have lost everything and have no capacity to do any of the above.
"If a man is proud of his wealth, he should not be praised until it is known how he employs it." ~ Socrates
Today's installment of Where to Invest 2009 will focus on the spirit of "rebuilding a portfolio stronger than before," although with no extreme differences in strategy than any other calendar year or in any other given environment.
Of course, there is no "one-size fits all" investment portfolio; however, I am assuming here that investors will use their portfolios for what I believe stocks and bonds are best suited -- building wealth over a long period of time in a way that will provide returns that will significantly outpace inflation -- not necessarily to "beat the market" -- but to balance risk and returns.
We will achieve this balance by increasing exposure to areas that have been beaten down in the short-term but maintain a strong and positive long-term outlook. Going forward, I will also assume that the prudent investor will have at least three years of short-term (less than three years) income needs and emergency funds allocated to money market accounts and certificates of deposit.
"If we will be quiet and ready enough, we shall find compensation in every disappointment." ~ Henry David Thoreau
As this Where to Invest 2009 series progresses over the next few weeks, I will provide more specifics on investment selection, but here are my general thoughts on asset allocation for the coming year and beyond:
- At present time I believe perceived risk is high and may remain that way for several months; but I believe "real risk" is falling. This is a ripe environment for long-term investing. In other words, I believe that the extreme levels of fear and pessimism are, at a minimum, slightly to moderately overdone at present time.
- Cash and short-term treasuries may provide "safety" but are yielding almost nothing now. As the "flight to quality" mentality subsides, investors will be looking for higher yields and they will have compelling reasons to return to large-value stocks, which are currently yielding more than cash and short-term bonds.
- I will give more attention and allocation to small-cap stocks, which have historically done well following recessions. For reference, according to Ibbotson & Associates, small-cap stocks had a cumulative return of 1,941.4% from 1932 to 1946, compared to large-cap stocks, which returned a total of 324.3% during the same period (a 6 to 1 margin of out-performance).
- For sectors, I still like Global Real Estate funds for defensive purposes, although 2009 may be a questionable period for the sector; I like Natural Resources (energy/big oil/gas refineries), which has arguably gone from extremely over-priced to moderately under-priced just in the last six months; and I still like the Health Care sector, especially active funds that invest in medical devices and biotechnology in addition to pharmaceuticals, for its perpetual defensive qualities.
- For bonds, I like high quality, intermediate to long-term corporate bond funds. For the younger and/or more aggressive investor, there are a few well-managed multi-sector bond funds with higher yield/higher risk attributes.
- I believe a gradual increase in exposure to foreign stocks and emerging markets is also wise for 2009. The prudent investor will not expect the United States to lead the world out of this great recession but will look to foreign and emerging countries, such as India and China, to lead the way.
- As for my use of passive/active funds, I like Index Funds and ETF's for Large-cap stocks and Natural Resources and actively-managed funds for all other areas. I never invest in (or recommend to clients) the use of individual stocks or bonds. This would go against the idea of simplicity...
"In character, in manner, in style, in all things, the supreme excellence is simplicity." ~ Henry Wadsworth Longfellow
Believe it or not, these ideas can easily be put to use with very little skill or ongoing maintenance. Personally, I don't see any reason or purpose to have more than eight to ten mutual funds, and I don't see any prudent reason for making more than an average of a dozen trades per year, if that.
For an early peek (and immediate gratification), that provides similarities to my balanced portfolio model, you may find some value in reading A Perfect Portfolio.
Above all, I will employ balance and the timeless virtues of simplicity, patience and moderation into the portfolio structure, while minimizing or eliminating the temptation to lead decisions with emotion... all strategies and attributes largely missing amongst the investor herd over the past several years...
Stay tuned for more on Where to Invest 2009...
Related Post: The Wisdom of Asset Allocation