Spend a little quality time talking with friends, family, or colleagues and one senses a dejected mood in the country. Funk is to shrink from, cower, to fear, and to frighten. That is the current mood of America. We look to our "leaders" and we come away with a "can't do" mentality rather than the "can do" attitude of the 1950s. For example, with interest rates at lows not seen for decades, why is the country not borrowing money to rework the entire infrastructure? Who is to say we cannot afford to repair all the decaying bridges? Yesterday I heard one person say – "America is one big pot hole." While this is hyperbole, I drive over one bridge each weekend that is ready to fall into the Willamette River.
As investors, what measures do we take as we wait for Europe to correct the direction of their financial ship? Rather than spiral down the staircase of despair, we can take action as our hands are not completely tied. Here are a few suggestions.
1. Maintain your savings plan. Stay disciplined, and if at all possible, increase the amount you are putting away as buying opportunities are close at hand and more will likely arrive over the summer months. We want to invest when everything is looking dark and dismal. Watch for a turn in the Bullish Percent Indicator. It is going to happen.
2. Market return projections are expected to range between 5% and 7% over the next year. If the returns are this low, it is imperative to keep costs to a minimum. Avoid commissions and high expense ratios. Reduce trading or use commission free ETFs. Lowering portfolio costs will always benefit the investor regardless of the return. We just become more sensitive to costs when they are a higher percentage of the total return.
3. With market returns expected to be low, I'm less inclined to stand pat with a buy and hold strategy. Therefore, I recommend that close attention be paid to the ITA Risk Reduction model. In addition we will watching with rapt attention, the Bullish Percent Indicators on a weekly basis.
In the morning paper I read where investors are stuck and unwilling to adjust their portfolios. Those willing to adjust fell to 11% today from 21% six months ago. Cash balances are high with the average at 26%. A few of you are raising that average. A lot of cash on the sideline bodes well for the next bull market. Where to invest is a problem. Many investors are fleeing to bonds, but those yields are not much above the rate of inflation. The current rate of inflation is a low 2.3%. This rate will reduce purchasing power by half in 31 years. Remember the rule of 72?
Investors don't know where to go with alternative investments as the different asset classes are highly correlated. We have discussed this among ourselves over the past months. Zvi Bodie would have us all put 95% of our money in TIPs and sprinkle the remaining 5% in a few equity holdings. His argument is that the longer one holds on to a portfolio of equities and bonds, the higher the probability of experiencing a three-sigma downturn in the market. A three-sigma bear market is a drop of 30% to 45% for most of our portfolios. He is right about another bear market hitting us. I've witnessed several in my investing lifetime.
Conclusion: Save, diversify, and use the ITARR model. Instead of hiding in TIPs with 95% of the portfolio, my tack is to avoid these huge down-turns by employing Tactical Asset Allocation methods such as the ITARR.
Disclosure: No positions