Where Should You Allocate Your Money?

by: Todd Feldman

The largest problem for long-term investors is deciding how to allocate their money. If you invested in gold stocks or several emerging market countries in August of 2011, you would still be down instead of up as opposed to being invested in a broad U.S. stock market index. At BFIA we use our proprietary behavioral measures to distinguish which markets will likely outperform. Our process is a two stage process. First, we determine whether it is advisable to be long risky assets or in cash. Based on our current analysis we predict that global markets will be continue to be bullish with a pullback in May and a small correction in September.

Second, once we have determined an investable environment exists, we calculate a long-term and a short-term behavioral measure for 36 different markets. The long-term measure takes a longer term perspective and detects how rationally the market is behaving. The short-term measure takes a short-term perspective, picks up more irrationality in the market, and aids in better timing of when to enter and exit markets. We take both measures into account when comparing the markets. Table 1 below shows the long-term and short-term ranking for each market, as well as the overall ranking.

At this moment we are invested in South Africa, Mexico, Thailand Japan, Malaysia, U.S., and UK equities in addition to U.S. REITs. We like some of the Asian Tigers in addition to some of the Anglo markets like the U.S. and the UK. The markets at the end of list include Israel and India. The fact that Israel is at the bottom of the list could be a problem for the global stock markets in the future. However, our absolute behavioral value for Israel is still below the crisis level for Israel. (These absolute levels and their explanations can be found in our newsletter.) Therefore, we are keeping a close watch for how the Israel indicator performs each week.

Table 1: BFIA Behavioral Rankings

Click to enlarge

Disclosure: I am long SPY, EZA, EWW, THD, EWM, EWJ.