My Investment Game Plan for 2011

by: Ray Merola

It's good to have a plan. So here's my investment plan for 2011. It's short and simple.

It is built around several broad macro economic themes. My assumptions are outlined briefly below.


  • The global economic rebound continues. The U. S. economy will participate, though our recovery will continue to be sluggish. Housing and unemployment will be weak spots. Manufacturing will show steady improvement. U.S. GDP will approach 3 percent. No double dip recession.
  • U. S. interest rates will rise, but only moderately. There will be no inflation spike in 2011. Ten-year treasury notes will yield not more than 4 percent. Banks will loosen credit somewhat.
  • Gold will continue its march upward. Oil will break $100 a barrel.
  • U. S. equity markets will trend higher in 2011. While I do not make any numerical proclaimations about the the broad indexes, I see upside for the equity markets based upon my previous macro assumptions, and the belief that corporate earnings will continue improve. Companies will also begin to loosen the reins on their cash hoards, augmenting growth and development.

My 2011 Investment Plan

Concentrate equity investments in three sectors: Industrials, Basic Materials, and Energy. Historically, during the early and middle phases of the economic business cycle, these segments reap the benefit of increasing demand for heavy machinery, engines, capital equipment, and construction materials. It takes energy to build these items. Improving developing economies will require incremental energy, further pressing energy demand. I envision ongoing infrastructure construction in places like China, Brazil, India and Southeast Asia enhancing the bottom line for industrial and construction-related products and materials. I especially like Caterpillar (NYSE:CAT), Illinois Tool Works (NYSE:ITW), Honeywell (NYSE:HON), Nucor (NYSE:NUE), and Exxon (NYSE:XOM) in this space. Some of these stocks have run up; however, I believe they are multi-year plays that still have plenty of growth left in them for the long-term investor.

Stay invested in a few select Technology and Financials. I favor the larger banks and technology companies. I plan to stick with Apple (NASDAQ:AAPL), Intel (NASDAQ:INTC), Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C). Citi is my “speculative” play. I believe it could be a double.

Underweight Utilities, Consumer Staples, and Health Care. I believe even modest interest rate increases will hinder the Utilities; they tend to be debt-heavy. Food and Drug stocks are not where the action will be in 2011. In addition, there's too much uncertainty for me around ObamaCare and drug-patent cliffs for many of the drug comapanis in the Health Care group. For diversification, I'll hold a few shares of Bristol Myers (NYSE:BMY), largely for the yield. If Pepsico (NYSE:PEP) or B&G Foods (NYSE:BGS) share price comes in, I'll pick at them, too.

Continue to emphasize dividend stocks with strong balance sheets. My equity portfolio targets an average yield that exceeds the ten-year T-Note yield (currently 3.3 percent). Investments in Telecom, Energy, and some preferred securities help me make the target. Selling options can juice the cash-on-cash return, too. I always start my investment review with a disciplined review of the balance sheet. Good relative debt ratios, ROE, and cash flows are my keys before investing; especially in higher dividend-payers.

Seek to invest in U. S. companies with strong international exposure. Most of my previous picks fit this bill. These stocks provide another element of global diversification. I rarely try to pick international stocks. For foreign exposure, I'll go with a good mutual fund or an ETF. For a specific 2011 pick, I like the Brazil market. These stocks were flat last year, while many other Latin America markets surged. I believe Brazil will kick in now that their elections are over and they get a handle on inflation worries. The iShares MSCI Brazil index (NYSEARCA:EWZ) looks good to me. It sports a 3 percent yield to boot.

Allocate equity securities to roughly 70 percent large cap, 30 percent mid cap, and 10 percent small cap. I've used this weighting for years. It's approximately the weighting of the Wilshire 5000 index. I rebalance holdings slowly over time to maintain it.

Continue to reduce exposure to bonds. The bond party's over. Maintain minimal exposure to a few good corporate bonds, or medium-term (five-year) Treasuries only if yields poke up to around three percent. Buy and expect to hold such securities to maturity. I'll put some cash into TIPS and I-Bonds as a way to hold some debt securities and hedge interest rate risk, too.

Flee most bond funds. I will hold limited positions in the PIMCO Total Return Fund (PTTRX), and the Templeton Global Bond Fund (TGBAX) to maintain diversification in the debt markets: but my finger is on the trigger. I like Total Return because it has a demonstrated, long-term ability to navigate down interest-rate scenarios. Likewise, Templeton Global has shown the strength and flexibility to handle the ups and downs. One notable area within the debt universe I will hold: High-Yield bond funds. I believe they still have some gas in the tank. I like the Third Avenue Focued Credit Fund (TFCIX), and the PIMCO High Yield Bond Fund (PHYAX). I'll watch the Third Avenue offering closely as their investment manager just moved on. Nonetheless, I believe this fund is attractive as some others in the HY sector. They have the flexibility to invest in wider range of distressed securities.

What's my cue to exit the high yield space? When the spread between Moody's Baa bonds and the ten-year Treasuries are less than two percent, I'll scale out.

Maintain a position in gold. I'll even pick at a little more upon a pullback. The yellow metal will continue to rise in 2011. Fiat currencies in the developed world are racing for the bottom. The dollar remains relatively weak. A rising middle class in developing countries like China and India will demand more gold for jewelry. Low interest rates continue to make the carrying cost for gold reasonable. I prefer SPDR Gold (NYSEARCA:GLD) for the straight play. The Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) is another way to play the space and jack up the return (with associated volatility).

Lastly, CASH is king. I tend to hold a fair percentage of cash in my portfolio, and it doesn't bother me to live with today's paltry interest rates. It's a hedge and a cushion. I'll simply ladder a few one-year CDs, even if the interest rates stink.

These views are my own. I receive no remuneration from anyone for my views, nor am not trying to sell anything. I am a Regular Joe who enjoys sharing my views, coupled with nearly thirty years of sound, practical investment experience.

Good luck with all your 2011 investments.

Disclosure: I am long CAT, ITW, HON, XOM, NUE, AAPL, INTC, WFC, C, BMY, EWZ, GLD, GDXJ. I also hold positions in the funds PTTRX, PHYAX, TGBAX, and TFCIX.