Drastic Times Don't Necessarily Call for Drastic Portfolio Measures

Over the last few days, I've fielded a number of questions – as, likely, uncounted other money managers have – that demand an answer to "What do I do now?"

My response is – "What's your chief concern?" Because what most bothers investors who don't eat and breathe investing as a necessary biological function governs how they will – or will not – allocate their resources. Are you worried about unemployment? Inflation? Subprime lending? Domestic equities? International equities? Emerging markets? Pump prices? If you're worried and you don't know why you're worried – or are worried because the pundits on TV tell you to be fearful – then you need to get a clue before committing potentially hazardous investment actions. And if you're interested in borrowing on margin to start shorting – or have recently taken myriad positions in ProShares short- or ultrashort etfs – having never before done so, please consider the gravity of your newly assumed risk.

What I've discovered is that – excepting those of us who frequent, and/or write for, commentary sites such as Seeking Alpha – so many folks do not see the interrelatedness of markets. They may not understand trends and they may not comprehend why stimuli generate certain dynamics as they do. And if they do see said interconnections, then they believe that correlations among vastly different asset classes are extremely high simply because these are "all investments": If Brazil's down, then China's down and emerging markets are down; if domestic equities' fall signal a run for cover, then Europe and all other internationals can't be far behind; and if your bonds are down on the same day as your long equities, then you begin to consider your mattresses as the new "safe haven".

But, as Jim Cramer perennially affirms, "There's always a bull market somewhere…" And there is – be it in tech (surely, the folks who make "mute buttons" used to silence those who use phrases such as "the 'R-word'"), seeds, bonds, fast food, or tires. But you've got to find it – or you've got to find someone good to find it for you if you want to partake of the markets' weaknesses. If you're not happy with either of these options then wait on the sidelines. Which would you rather experience – jumping in too early (trying to "time the market") and catching another 10-15% loss that could impel you to prematurely sell, or missing the first few percentage points of a capitulated, bottomed out rally? There's absolutely no reason to hide under the sheets during these times. But there's also no reason to cavalierly throw money at your broker or online account, yelling, "But everything's down so much: we've got to buy something!"

Our holdings are not suffering heavily in 2008 – some have booked gains. And I predict that some of you have done well, also, either by shorting or carefully picking (or selling into strength) your longs. But some of you have fared worse. If you are long the markets, consider adding to positions when it will help your basis – but keep cash in reserve for harsh days. If you're severely underwater, consider (as a function of your risk tolerance and liquidity) how much more you can hack. Avoid "I'll wait until it returns to break-even." Not everything does. But also consider the costs of your actions if you, say, sell at the bottom of a turnaround day. If you're already on the sidelines, with most of your capital liquid, take a look at your buy – or "wish" – lists, but be careful on entry: the current market waters are murky and no one – regardless of background, degree, or previous investing prowess – knows when the malaise will lift. Those with absolute certainty in their opinions should be shunned. Let their performance speak – not their mouths.

Core portfolios – such as those based around VTI, VEA (which I've come to like more than EFA), AGG, XLU, and DJP – are built as such to limit the volatility of individual equities. Engage those if the premise is appealing. Similarly, longstanding portfolios with excellent bases should likely not be dumped on a whim. But now is not the time, unless you're fully aware of the potential for further losses, to define a bottom and "place bets", "play the markets" (I've always hated that phrase), or "jump ship" because core holdings with continuing good prospects are off of their highs. Maintain caution, don't allow overconfidence garnered from a few good performers to rule you, and be able to explain every action to someone just beginning their investing journey (after all, if you don't get it, why would you do it?).

Invest soundly.

Disclosures: Author is long of VTI, EFA, and AGG.

Comments

[Lilguy:]

This reads like a Chinese fortune cookie or an astrologer's commentary on the day for Sagittarius. No insight, no help.

2008 Jan 19 12:01 PM

[User 123732:]

A quick reminder to not let short term emotion dictate intermediate & long term investing goals or trading styles. Well done.

2008 Jan 19 05:09 PM