Divorce The Doom: Time For A New Philosophy

Includes: DIA, SPY
by: Financial Sense

By Cathlyn Harris

Are you addicted to doom? Do you find yourself compulsively browsing websites touting headlines like "Get Out Now!" or "A Crash Is Coming," or "Pull Your Certificates out of the Market?" Do 5% corrections in the market prompt you to sell all your stocks and move to 100% cash? Are you holding enough physical gold to open a small mint? Do you have a financial meltdown mentality? Maybe it's time to seek a doom recovery program.

I'm being a bit facetious, but I'm also sympathetic. I understand why the doom thought process is so attractive - and addictive. I think most investors and asset managers are still, on some level, reeling from the fallout from the 2007-2008 credit crisis, especially since it followed so closely on the heels on the bursting of the tech bubble. All of us want to know why it happened. All of us want to know what we should be watching for in case it starts to happen again. And all of us want to set ourselves up to guard against it in case it does.

Setting aside the question of whether or not the various strategies touted by various newsletter writers and sites will actually protect investors against the next big market downturn (for example, gold certainly didn't shield anyone in the fall of 2008), the bigger question really is: Are those strategies necessary at all... at least right now? Are those strategies hurting your investment returns, or helping them? Is the next financial crisis imminent, or might it be years away? Is it time to revisit the underlying philosophy behind your investment decisions? In short: Is there reason to "divorce the doom?"

More Right Than Wrong

In Jim Puplava's October 2013 meeting with investors, his main message was: "There are more things that are right than wrong with U.S. economy and markets." During the meeting, he highlighted some of these "right" things:

  • Demographic trends
  • Entrepreneurial spirit
  • Labor flexibility
  • Declining need for foreign financing
  • Strong U.S. Dollar
  • Growing energy sufficiency

Among other trends, these factors have contributed to "reshoring" and a manufacturing renaissance in the U.S.

This doesn't mean the U.S., or the U.S. stock market, are out of the woods yet. Plenty of market technicians are expecting a 20% correction sometime this year, but economic indicators are still, overall, looking positive.

Yes, there are serious things wrong with the US deficit and spending. Yes, there are challenges to the economy. But, as Jim and our other Newshour guests have discussed, there's still a lot going right for the U.S. and its economy.

What This Means For Investors

The upshot of the "more right than wrong" reality is that:

  • For the time being, there is reason to be invested
  • For the time being, there is reason to keep supporting U.S. companies, the U.S. markets and the dollar
  • For the time being, we don't view an economic collapse as imminent or a dollar crash as imminent

This does not mean that investors can be asleep at the wheel: stay alert for straws in the wind that signal change (we watch economic indicators, market health indicators and credit default swap activity, among other "straws"). But what it does mean is that you should be investing to take advantage of what the market is actually doing, versus what you think it should be doing.

Stay Flexible

Markets go through cycles: whether short, intermediate or long, these cycles often represent periods of time where, for example:

  • One of the three major asset classes-stocks, bonds, commodities-outperforms the other two
  • A sub-category of one of the three major asset classes outperforms other subcategories (think of times when technology investments outperformed utilities, or times when precious metals investments outperformed investments in foodstuffs)
  • The overall direction of an asset class is up (bullish) or down (bearish)

As an investor, it's critical to decide if you're trying to play long-term trends, intermediate-term trends or short-term trends, or a blend of time frames. This helps you determine which asset class to focus on, and how often you should be revisiting your investment philosophy, and how frequently you should be making shifts in your portfolio.

But regardless of what investment time frame(s) or asset class(es) you focus on, staying flexible with your philosophy and investment strategy is key, since whatever you focus on is going to go through periods of outperformance, and periods of underperformance, whether for long periods or short periods. So even for those who focus on a long-term investment theme, there is going to come a time when that theme is going to lose its performance edge. It's at that point that the investment strategy and philosophy needs to be reexamined.

Consider Stocks

So if the secular commodities bull market is going through an underperformance period, what asset class is likely to outperform in the intermediate term?

It is PFS Group's opinion that we are currently in a secular (long-trending) bull market for stocks. Despite negative realities of U.S. government debt and spending, and even though the market has had huge run up, we are not of the opinion that the financial system is about to collapse - we don't see any signs of imminent danger on our indicators. That is not to say that a so-called "black swan" event couldn't derail things, but that's nothing new. Black swan events are always a risk.

Over the past year or so, Jim Puplava and I have been sharing various thoughts with our Lifetime Income listeners about how to approach their investments. We've shared general ideas about portfolio allocation and specific situations based on our real-life experiences with our clients and listeners. One of our most popular programs over the last year was "De-Bunkering Doomsday Prepper Portfolios," which aired in March of last year, and which we ran again in September.

Nearly a year after the first airing of "De-Bunkering," we continue to get calls and queries from (self-described) "Doomsday Preppers." Frequently these investors went to 100% cash after the 2008 crash, and then began searching for answers as to why the crash happened. Generally, the pattern is that they began reading different websites and newsletters about the financial system collapsing, the dollar collapsing, hyperinflation and conspiracies to suppress price of gold. Their next step was often a sizable investment in precious metals, usually in physical format, and typically stored close to hand. What then generally follows is a story of riding the metals prices up, then down, then sideways over the past several years. And the end of the story tends to be confusion. If everything they're reading and following is pointing to runaway government spending, record debt levels, staggering Fed balance sheets and anemic economic growth, why isn't the cash/gold investment strategy working?

Following are a few reasons why we think this is the case. Presently:

  • Disinflationary forces are at work counteracting the inflationary forces
  • The major driver behind the last upsurge in commodity prices - economic growth in emerging markets-has slowed
  • The US Dollar is (still) the world's largest reserve currency, with no near contenders for a replacement, at least not in the intermediate term

Recent geopolitical activity has pushed up the price of gold, and the US Dollar is still holding its own (see the Bloomberg Dollar Spot Index), but we have several other concerns about these "Doomsday" portfolios:

  • Cash is very vulnerable to a dollar collapse/devaluation/revaluation. While we don't view any of these as imminent, if these events are of concern to an investor, cash, CDs, money market and similar instruments are most vulnerable.
  • Gold is a very volatile asset class, its price fluctuates fairly dramatically. For hedging against inflation/dollar devaluation consult with your investment professional about an allocation that may be appropriate for you.
  • Such a narrow portfolio misses activity in other asset classes (case in point: stocks).

Is It I?

If your investment approach has been going through an extended period of underperformance, it may be time to ask yourself why. Is the underlying philosophy still sound? Is the issue primarily one of timing? Or maybe it's an issue of the specific investments you've selected, or their overall weighting in your portfolio.

Your investment philosophy is not a religion, nor are you wedded to it, so it's healthy - not disloyal - to examine other options, re-examine the data, and stay open to alternate interpretations. If your period of research and reflection leads to a "reconversion" to your approach, fine. If it prompts you to pursue a different direction, fine. The important point at issue here isn't so much whether to change your approach or not, it's to try to be objective about the information on which you're basing your decision, so that the outcome is reasoned and rational and purposeful.

However, being flexible does not mean being reactionary. When the market has a 5% correction, selling all or a portion of your portfolio as part of an investment approach that includes parameters of when to exit and when to enter back in is not the same as selling all or a portion of your portfolio out of fear that the correction will keep extending. The former is part of a strategy, the latter is essentially a "dead-end" decision without specific follow-up steps.

So if you're finding yourself either so paralyzed by fear that you're unable to take any action in your portfolio, or so driven by it that you're making dramatic moves, it may be time to "divorce the doom," and put yourself out there in the investment philosophy dating pool again, and find a new investment approach that's healthier for your psyche - and your portfolio.