It's probably been at least a good two to three months that each of my kids knew exactly what they were going to dress up as tonight. It's not even that much of a stretch to say I've probably heard what they will be next year as well! For many children this is a big deal…and I believe Halloween goes beyond just the mad evening hunt for candy. It's an event that retailers are keenly aware of and prepare for. In a sense it also truly seems to kick off the string of holidays that are fast approaching us this time of year.

As it relates to the economy Halloween itself is often a precursor to what many use in forecasting retail sales; Black Monday. Halloween sales have trended upwards for the past few years and 2012 looks to be the strongest ever with the average person spending almost $80 each. According to the National Retail Federation about 71.5% of America plans on celebrating in some fashion; whether it is in costumes, decorations, or simply handing out candy to happy little faces. So, what does all this have to do with financial advisors?

Well…like many parents of younger children I was asked what I'm going to dress up as. I always joke with friends that I'm going to wear my usual costume of a tired middle-aged business owner. Aside from receiving a courtesy chuckle it simply means that I'll be chasing two kids in the dark after a day of work. Once we return home I get to see my wife find a way to let them choose a few favorite candies and then make them all magically disappear! But what is my real costume this year?

I'm a big fan of "looking under the hood"; whether that is in regard to a car, a portfolio, or in this case… What's behind a person's exterior and what makes them really tick? I firmly believe that we all find ourselves in certain careers for a reason. Sure, there are "unexpected" turns in the road but somehow there are driving factors that help folks land in their respective jobs. What made you choose your career? Why do you think your financial advisor chose his or her path to this industry?

In my opinion it's sometimes "Halloween scary" to learn why certain folks chose the financial services industry. Did they have an affinity to numbers? Is there some underlying passion to help build retirement plans? Did they stay awake at night trying to dissect the 'Black Scholes Model'? Was their childhood idol the Nobel Prize winning economist Harry Markowitz? Not likely…

The reality is that in most cases it's due to the perception that there is a lot of money to be made. Many current day financial advisors weren't even licensed when the movie Wall Street came out. Perhaps the images of Gordon Gecko (Michael Douglas) with his power ties and cuff links helped drive them to chase that dream. Sadly enough, many insurance salesmen are dressed up as financial advisors or even estate planners. Don't get me wrong…insurance has a place in most every financial picture but it's how it's presented and offered that makes a difference. Did you buy your insurance or was it sold to you? I think you get the point but my main question is to understand, connect, and flush out why your advisor is where they are and what truly is "underneath their hood/costume"?

My business partner, Matt Blake, often shared with me how he was basically born to be in this industry. Growing up in the small Colorado town of Evergreen, his father was a stockbroker and his grandparents were both successful entrepreneurs so he was surrounded by business. He actually ventured into other industries but his strengths and passion continually brought him back to the financial services industry. Throughout his career he has attempted to redefine the industry and bring a higher level of service than clients are used to typically receiving. While he has a variety of experience in the financial services industry and has been forced to wear many different "costumes", he embraces the fact that he is driven to serve his clients. Simply put… to truly be successful and happy you do what you really know well and what you love.

Personally, I grew up as a child of a World War II veteran who was much older than most fathers in my neighborhood. He was born in 1925 in Cleveland, OH during the Great Depression and some of the stories he told were hard for me to digest as a child. It wasn't until I was older that I was able to fully "connect all the dots". All those lessons of cleaning my plate weren't just to grow "big and strong"…they were stories of appreciating what you have and understanding that it may not be there tomorrow. In 1987, when I declared that I knew I wanted to be doing something in the investment field, I was told to "find something else". Do something that relies on a tangible good…like real estate. You can touch it, build it, and change it. To some in that generation, investments were fleeting promises that could vanish in an instant…so "stay away". Sometimes I see these newer generations (Gen X and Gen Y; the Millennium generation) taking on similar mindsets due to some of the recent financial disasters. Ironically enough though, both of these younger generations have started saving for their retirements almost a decade earlier on average than their Baby Boomer parents.

Once you understand what's under the typical financial advisor costume…ask yourself what is under the costume of your actual portfolio? Understanding who built it for you will clearly help you see what the portfolio is really all about. If your investment advisor is dressed up as someone who works at a large brokerage or wirehouse you are dealing with someone who is typically paid on commission. There are four large national firms remaining with names you may still recognize: Morgan Stanley Smith Barney, Bank of America's Merrill Lynch, Wells Fargo Advisors, and UBS.

If your advisor is at a bank you can almost be assured that your portfolio is largely positioned in proprietary and high fee products. Banks are smart in that they know most people feel less intimidated and have their "safe" money sitting in a savings or checking account. Some investors still hunt for extra yield via CD's but if you've been awake for the past few years you'll know that the return on CD's or money markets is about "zero point nothing" percent. Banks love to cross-sell and therefore attempt to keep the money "sticky". If a client has a checking account/bill pay service, maybe a mortgage, and then investments…they're all likelier to stay. The problem for the investor though is that they also have limited choices and most bank employees are not all that sophisticated when it comes to investment knowledge.

Another seemingly less threatening place for the investor to seek help may be at a discount brokerage like Charles Schwab, TD Ameritrade, Vanguard, Fidelity, Scottrade , or ETrade. If you're truly a self-directed investor and actually know what you're doing, then these are fine venues to park some of your money. Realistically though, several of these firms will pitch you offerings that are either very boilerplate or simply outsource you to an advisor where they often receive and/or share a fee. The alternative is an "in-house" solution that may not be as sophisticated as you are led to believe. Charles Schwab, for example, offers their Schwab Private Client service to clients with assets over $500,000. They charge clients 0.75% but basically put the client in a fairly mundane model that is not actively monitored but rather farmed out to a team in a call center. This is not so much a "wolf in a sheep costume" but you hopefully can see the potential conflict of interest or certainly the incentive for a discount brokerage representative to push you into a 'solution'.

There are also a handful of more regional firms such as Raymond James, Ameriprise Financial, or even your local Edward Jones type office. What you'll almost always find here is someone who is pushing annuities/insurance products and loaded mutual funds. Again…understanding how people are compensated and the structure or platform they operate under is critical to how your portfolio is built.

Some investors that have strayed from these more traditional venues for investment advice have gone to "independent broker dealer" offerings like LPL. Under this arrangement you have someone who is basically a contractor under a commission or fee-based structure as well and you will typically be put into loaded products or platforms that cost well above 1.5% after all fees, costs, and expenses are tallied.

The only option or "costume" in this Halloween case…that has a "fiduciary duty" is the Registered Investment Advisor (RIA). A fiduciary duty is an obligation to provide proper investment advice and always act in the best interest of the client. One would think this is the case for all of the above firms and platforms that I've described. This is perhaps one of the biggest and most critical misperceptions out there. All the other platforms and firms I reference above are simply held to a "suitability standard" which just means the investment must be "suitable" to the client at the time of purchase. By definition, and in all reality, this is simply a lower standard than that of an RIA. People's situations change all the time. What was a "suitable" investment last year could be drastically disconnected to an investor's situation this year and only the RIA would have a legal and fiduciary duty to make appropriate changes and recommendations.

That's the costume we wear at My Portfolio Guide; the RIA outfit.

Only by having worked at some other firms over the past 15 years were we able to learn what really is behind those other costumes. Tonight, we'll walk the streets of our neighborhoods with the same outfit from last Halloween. Our kids may not think it's very exciting or different than last year…but you know what???

This costume is ethical, fair, and it allows us and our clients to sleep well at night knowing that we are doing the right thing; inside and out.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

First and foremost, even if it could be proved beyond any doubt that the month of May and some of the following ones are not friendly to the markets, how do you manage for that? There is no magic announcement on whether selling May 1^st or May 30^th is the right time. If you were fortunate enough to pull the trigger in advance of such a date you also are now given and equally greater challenge of knowing when to get back in the markets. Many investors have made instinctive or simply lucky calls on timing the market but doing so twice is where it becomes a losing proposition. There are other implications that follow such as taxes and investment trading expenses that typically don’t bode well for making such moves.

Now that I’ve broad brushed the topic and seem to portend that it’s not worth your time or money in reading another CNBC fear stoking headline, allow me to discuss what the supposed ‘sell in May and go away” phenomena is and why it may make sense to consider it this time; at least with a rational approach and with less reliance on a properly functioning crystal ball.

Markets are indeed cyclical as they predict what the economy is doing. There is truth to the markets being historically weak from May to November but that typically occurs when the Fed is tightening. With QE2 ending this June we will be in a neutral phase with speculation on further moves. The Fed ideally wants to avoid any tightening policies to avert dampening the economic recovery. More than anything, I see the coming months as ones where the headwinds and “wall of worry” that this market has climbed will become more apparent. Employment numbers still are rather dismal, there is continued unrest in the Middle East, and with oil prices climbing we are more than likely to see the markets take a breather.

I don’t gamble and I don’t market time, but it would be my strong inclination that rebalancing to a much more defensive position over the next three months is the prudent call for most. In my opinion, and how I manage portfolios, I believe there is never a time to completely “get in or out” of the market. You can always be flat wrong and to recover the potential lost ground puts you in a situation of being emotional and further compounding the mistake. We will hold much of our base allocation models but over the next few weeks there will be cash raised. This measure does not call for the other extreme of shorting, put options, or even necessarily hedging our “bets” with other instruments, but rather a simple and disciplined approach to taking some profits and money off of the table. This isn’t a time to get fancy but rather manage money, risk, and volatility wisely. Besides…. there is one saying I have read and believe in…”you don’t go broke taking profits”.

Lastly, unlike many media outlets or market newsletters, this article will be followed up with specific examples of when and what we buy back into. For now, (as of May 4th, 2011)  we are suggesting a first step in reducing exposures to all equity asset classes by 10%. (Large, Mid, Small, International, and Emerging Markets) While every portfolio is different, the specific corresponding ETF's we suggest selling are IVV, VWO, VEU, VO, and VB)

There could be the case to make a more aggressive adjustment, but being early in the month and after this extended period of strong returns, we’ll hold the ship in this direction for now.

Stay tuned for more updates… 

Over the past month offices around the country have been consumed with March Madness and “bracketology” chatter. Admittedly, I’m a big college basketball fan, so this is one of my favorite times of the sporting year. You may be asking what does it have to do with managing your portfolio or the investment world? At first glance it may not, but I thought I would have a little fun and couple it with some asset allocation parallels. After all, there are many folks who have simply thrown their hands in the air at one time or simply succumb to the notion that investing is like educated gambling. There could be some truth to that depending on your approach…

For those of you that aren’t familiar with the NCAA and it’s annual basketball tournament…(let’s not be friends)…just kidding. Basically there are 68 teams selected and seeded based on their season results and perceived quality. Every March the NCAA holds a single elimination tournament to crown the number one team. As of this past weekend the field was whittled down to the Final Four teams left to battle it out in Houston, Texas; Butler University versus Virginia Commonwealth University and University of Kentucky versus University of Connecticut.

Part of the appeal of such a tournament is that theoretically any team that makes the “big dance” has a shot at winning it all. Each and every year there is a proverbial “Cinderella” team that surprises everyone including all the experts. Prior to the tournament there is always plenty of banter and opinion on who wasn’t invited or furthermore arguments around the seedings of the teams that did make it. That’s where I see a sort of parallel or analogy to investing and having to make choices among the multitudes of investment choices. As many investment choices as there are, there are also about as many differing opinions…

Even President Obama gets his bracket done and shows his passion for the game. Granted, there are those that opine his attention might be better allocated elsewhere, but regardless much of America gets into March Madness. Speaking of the President and his picks…. like many, he chose all number one seeds this year and this is only the third time in history that there were no number ones left in the Final Four. I should also mention that a number 16 seed has never upset a number one seed but when it comes to investing...this happens all the time. If you have ever looked at a chart of all the different asset classes and how they perform year to year…there is rarely a pattern or consistent way to determine next year’s “winner” :

http://www.callan.com/research/download/?file=periodic/free/457.pdf

For chuckles, I’ve “seeded” or ranked four major asset classes (like the regions) and several of their components. I was lightly scientific in this process as I basically focused the results on just the past year. In some cases I gave a lower performing investment a higher seed if it was trending higher with recent strength or was more consistent over a longer period of time.
 

http://www.myportfolioguide.com/images/stories/bracket.xlsx 

I will now comment on some of the key match-ups and explain why my Final Four going into Q2 2011 looks the way it does:

Large Cap – What I’ve done in this asset class is break it down with two major “styles” (Growth versus Value) and then focused on several of the 10 major economic sectors. For the sectors that I favor right now I have selected a few individual companies to consider. I’ll do the same thing for a few Small and Mid Cap companies in the opposing regions.

Key match-ups:

Let me begin by saying that obviously past performance can’t predict future performance but it should be noted that the third year of a Presidential cycle is the strongest averaging +17.1% and within that year the second quarter is also the strongest coming on average at +5.3%. Several economic sectors this past year continue to show strength. Of the 10 major sectors, especially within Large Cap, the ones to favor are Energy, Industrials, Materials, and Technology. For the sake of my bracket illustration I want to highlight the #16 Alcoa Aluminum (AA) run. As mentioned earlier a #16 has never upset a #1 but in this bracket I could see something like this playing out. Alcoa Aluminum is a stock that may not knock your socks off at first glance but in this asset class that’s sometimes what you want. Here is a consistent player with an expected 5 year growth rate of 13.2%, a forward P/E of 11.2, and has returned 19.6% so far in 2011. A global stock like this still has solid fundamentals and is likely to continue with aluminum orders up 4.2% in February (along with the two prior months at 2.6% and 3.8%).

Aside from Large Value being the overall winner in this bracket a familiar “team” and recent star is Energy. On a very basic consumer level we’re all noticing the uptick in prices at the gas station and that trend is likely to stay. With any economic recovery you will see an uptick in the demand for consumption for oil. Along with this increased demand comes higher prices. The US is still at pre-recession levels and even if we continue to slowly recover, the trend for increased consumption is clear. Couple this with substantial demand from India and China and the Energy sector has plenty of continued upside.

Lastly, the bracket contains a few stocks that I’m not implicitly taking bets on but rather want to highlight why they might be part of your portfolio mix. We can run countless screen to determine which stocks to own but sticking to some of the main themes I touch on above you may want to look at : (1) Apache Corp (APA); Materials sector / Oil & Gas exploration and production, +9.7% YTD (2) General Dynamics (GD); Industrials sector / Aerospace, Defense products & services, 10.78 P/E, 2.50% dividend yield and (3) Applied Materials (AMAT); Technology / Semiconductor equipment & materials, +10.2% over past 3 months, 2% dividend yield.

Small Cap – I’ve done the same thing with this “region” as for Large Cap but also added Mid Cap to this portion of the bracket. One could argue that Mid Cap should have its own bracket as it is a very distinct asset class. Some firms and investment advisors incorrectly lump the two asset classes (small and mid) together but for the sake of this illustration I will join them! Instead of choosing Sector ETF’s (Exchange Traded Funds) for this asset class I’ve selected individual companies.

Key match-ups:

The energy theme plays out strong in this portion of the bracket as well. Sometimes it’s safer to pick an ETF in a more volatile asset class like this and “watch all the boats go up in a rising tide”. Since we’re having fun picking “teams” here let’s take a look at the #6 seed with Newfield Exploration (NFX). Again, I’m following a winning sector and highlighting a company that has done well amongst its peers. Newfield Exploration has been on a tear as of late being up 39.6% over one year. Is their tournament run about to end? Goldman Sachs recently pared down their holdings in the company by about 3%. Things may slow from this torrid pace but this oil and gas exploration company still forecast increased production and with higher crude oil prices the company stands to benefit. S&P recently increased its price target to $92/share and it currently trades at $75.91.

For the bracket’s sake…every good run comes to an end and I simply believe this part of the bracket has too many teams that did not get selected. In other words…Small and Mid Cap is an asset class that recently has led and it may be time to focus more on a shift in leadership. As the market recovery and bull market matures, take this opportunity to size up which Small Cap “teams” you still want to hold on to. The divergence between Small and Large cap will begin to emerge over the next few quarters and it’s time to avoid being enamored with past performances.

One materials company that may continue their recent winning streak is Eastman Chemical (EMN). This #12 seed goes far in our bracket and for decent reasons. It’s easy to think that after a +54.6% increase the past 12 months that the company is due to take a breather. Not so ; Eastman Chemical continues to surprise Wall Street expectations and still trades at a reasonable valuation. EMN has an attractively diversified business and seems to be firing on all cylinders right now. Sales and growth continue to show strength and the company also recently re-opened a Texas facility that was once closed to accommodate for increased capacity. Investors are also being treated to a 2% dividend yield on this stock.

Bonds – This “region”/ asset class is sure getting lots of press and many fans feel the choices here have run their course. It’s not the safe haven it once was…or is it in fact this years best choice after a remarkable recovery in the stock market? One side note here is that I threw in two precious metals and real estate. Again…there are only four regions and even though the NCAA wants to add more teams every year…I need to stick to a manageable bracket too…

Key match-ups:

There is no one favorite in this bracket and it wouldn’t be surprising to see any of these “teams” put together a nice winning streak except for any that have the “mascot” long-term in their name. Oh sure…that’s obvious to everyone but why do so many investors still hold longer-term instruments? I do a decent amount of due diligence on why certain bond mutual funds are outperforming others in a low rate environment. Without going too deep into this here, it’s worth taking a peak underneath the hood of your bond fund if you haven’t over the past year; it’s safe to say that they’ve likely changed a few things.

In this region of your investing bracket diversification is again the name of the game. I mean that on several levels (maturities, types of fixed income, and geography). The one thing I tend to avoid is picking corporate bonds unless I see a particular value in one. That said, our #4 seed will likely go far in this year’s tournament again. It won’t win the big dance but you can look for iShares Investment Grade Corporate Bond ETF (LQD) to provide excellent diversification, the right maturity range, and a current yield of 4.75%. All this with just one line on your brokerage statement instead of 20 corporate bonds or a bloated mutual fund that will charge you north of 0.50%. The very popular PIMCO Total Return Fund (PTTRX) charges 0.46% but has underperformed LQD over 3 months and 1 year. LQD has an internal expense of just 0.15%.

One area that we could almost devote an entire bracket to is with regard to International Bonds. Most advisors and investors ignore this area and aside from a token exposure (intentional or not) it’s simply misunderstood and overlooked. I have them seeded #2 and going deep into the tournament. One could easily make the case for this being a Final Four candidate in 2011. Everyone complains about interest rates being so low at the local bank and for the bond investor this poses another frustration. With rising inflation it’s prudent for the fixed income investor to remain in cash and/or low duration instruments. The two main risk factors in bond investing are credit and interest rate risks. You can take a few more chances with the associated risk by going high yield with our #5 seeded SPDR Barclays Capital High Yield (JNK). Alternatively, you should focus on always incorporating a percentage of your bond portfolio overseas.

Lastly, take a look at our seeds that “play” in the ‘inflation conferences’…Each deserves a look and should be a part of your investment bracket/portfolio. I touch on shorting US Treasuries, or at the very least limiting your exposure to them, at the end of this article. You can do so by owning TBF (ProShares Short 20+ Treasury). Another added inflation hedge is to own some TIP’s (Treasury Inflation Protected Securities). These types of bonds tend to outperform regular bonds when inflation is projected to rise. Even if you don’t believe that we are headed towards hyperinflation do yourself a favor and root for our #2 seed (TIP) for at least a couple of rounds. They have enjoyed a +5.7% return over the past year and boast a current yield of 6.4%.

International – Many investors ignore international investing or simply don’t allocate enough towards it. More than half the world’s opportunities are overseas (58%) so for one to not have exposure here is a major mistake. While investing in foreign funds and companies presents unique risks such as currency fluctuations and economic/political uncertainties, you can actually lower your portfolio’s volatility over time by being exposed to this asset class. Another wrinkle in this region, however, is the balance between developed countries and emerging markets. Emerging markets trounced all asset classes from 2003 to 2007 and then lost -53.18% in 2008. Should we run away from that volatility? Well…check out the brackets because the following year they led everyone again with +79.02% return in 2009.

Key match-ups:

Did I briefly mention the word hyperinflation in the Bond bracket? Yes…and that’s all that needs to be said for our #1 seeded friends in Argentina. Even with the recent tragedy in Japan and their relative lack of economic performance over the past 20 years, I will forecast another #16 seed upsetting a #1 seed. In this case, you have Argentina (ARGT). Soybeans, wheat, and flour accounted for about 70% of the country’s exports last year. Commodity prices have been soaring and with weekly price increases often in the 5-10% range this country is fighting the battle of selling goods priced lower than what they now cost. ARGT is up 905% over the past three months.

Maybe with all the gold bugs out there if I mentioned that Peru ranked fifth in the world in gold production it would garner some interest? I once hiked the Inca Trail and recall the guide telling us that we were going to pass more microclimates than anywhere in the world within a five-day hike. This fact leads me to talk about the investing merits of our #4 seeded country, Peru (EPU). With commodities in increasingly high demand this country deserves a strong look.

With a 30% return over the past 12 months Peru actually will end up losing to a very consistent “team” in this bracket ; Canada (EWC). Two of Canada’s strongest sectors (Energy and Materials) make up over 46% of this country’s economy and are the very favored in terms or global positioning. Investing in Canada is a strong way to play rising commodity prices along with a weak dollar. Canada is the largest supplier of oil, natural gas, uranium, and electricity to the U.S. so as we continue to recover and demand increases, Canada stands to also benefit.

Final Four summary:

As I alluded to earlier, the advantage and distinction an investor has in choosing their “Final Four” over that of a basketball bracket is that you need, and should….choose more than one winner. It’s almost too cliché to state that one “shouldn’t have all their eggs in one basket” but I can’t stress this enough. All too many investors get caught up in chasing the most recent winners. If I were to overweight my investments each year based on last year’s winning asset class I would be consistently wrong, frustrated, and eventually broke. Why do so many investors do this?! If you’re ever in line at the grocery store it doesn’t take long to see a financial magazine touting the “10 Must Own Stocks of the Year” or “Hottest Mutual Funds you Need to Buy Now!”. How many of those are actually in the top 10 the next year? Very few… One recent study showed that of all Large Cap funds that beat the S&P 500 Index one year, only 41.6% managed to do it again the following year. After three years that same group had only 9.7% still beating the index. What a fund, index, or advisor did one year (or five) tells you nothing about how the performance will look going forward.

My Final Four is actually very short-term as I believe this year will have several themes continue to play out but there will be some adjustments to asset classes that have seen recent success. In general I see stocks outperforming bonds as one major race this coming year. Breaking that down further, I believe we must have a very healthy weighting towards international equities and in particular countries that are benefitting the most from a global recovery and increased demand. Don’t ignore emerging markets but having exposure to countries like Canada makes sense as it has benefitted from higher global demand for industrial metals and crude oil while still enjoying stable inflation levels.

Speaking of inflation…another Final Four candidate to incorporate into your portfolio is you haven’t already is TBF (ProShares Short 20+ Treasury). When one of the most renowned bond managers in the world, Bill Gross, decides to unload treasuries as quickly as he can…something tells me that his take on the Fed and the direction of Federal Reserve policies might be closer to the mark than off of it. With an impending lack of demand in US Treasuries after QE2 ends this coming June, we’ll see Treasury yields rise and prices fall. Don’t wait for more writing on the wall to be etched in…just hedge your bets a bit within your bond allocations and pay attention to your overall percentage in Treasuries.

Typically we see Small Cap lead Large as economic recoveries take place. Over the past 12 months this has been the case. Going back further the trend also holds true but I’m not here to show you how to look in the rear view mirror. The road ahead is bumpy and in my opinion, the safer route appears to be Large Cap. While there will still be several Small Cap stocks that will continue to outperform I believe that a weaker dollar and a very cheap Large Cap asset class makes this a very attractive place to be. In particular, I would overweight Large Cap exposure to value over growth. Part of managing money is being able to account for mistakes and unforeseen occurences. That said, we may likely easily see Small Caps win out again in 2011 which is why you should retain some exposure. That said, a safer way to play a potential end to this run is beginning to increase Large Cap value stock exposure. About 40% of the S&P 500 Index is comprised of mega-caps which are companies with market caps greater than $100 billion. This group of mega-cap trades at a cheap 12.5 times earnings and also yields an average of 2.2% dividend which beats the average S&P 500 stock at 1.8%. One more fundamental consideration is that if we are indeed headed towards more of a “new normal” and overall economic growth will head towards a slower pace over the next 1-5 years, we would likely begin to see a reversion from Small to Large and from Growth to Value.

In summation, enjoy the game and don’t get hung up one just one team. This year will continue to bring us some upsets and also highlight some of the storied programs. The real winner every year in the “Investing Final Four” is the one who typically has a solid Sweet 16 showing. Take a look at your investment mix now and make sure you have a healthy dose of some of these “teams”. The beauty of the tournament is that within the 16 teams mix, you’ll find a new face like the VCU Rams and an old familiar name even with young players like the Kentucky Wildcats. The same holds true for this years investment bracket with a respective comparison in shorting US Treasuries and holding Large Cap Value.

A very dear client of mine called the other day and asked about all the stories surrounding inflation. She had particular interest due to one coming from political commentator and television host, Glenn Beck. Initially my ears perked up because, whether you like him or not, Mr. Beck is a very talented personality and from the few times I’ve viewed his program he attempts to make a solid case for his viewpoints by using facts. He also seems to do his homework (or at least pay others to kick the tires with decent due diligence)

That said, he is still in the entertainment business and the last time I checked he doesn’t manage a dime of anyone else’s money. More and more I hear his name being mixed in with economic headlines. This trend, in my opinion, appears to be more than a commentator who disagrees with anything related to Obama policy. For the past couple of years the economy certainly has been topic numero uno and I believe he, as an extremely savvy entertainer, knows where the highest Neilsen ratings will come from.

Back to the concern over inflation and this story….What is inflation and where are we now versus historic norms as well as what could be looming in the future? Glenn Beck says 2011 will be the year where we don’t just outpace historical norms of 2% to 3% inflation like we see now but we will have hyperinflation upwards of 50% per month. He goes as far as saying that the top crisis in 2011 will be a food crisis. Let’s mark that prediction and come back to it 12 months from now. Most entertainers, and advisors for that matter, never come back to their lock down pick of the year if it doesn’t turn out. (and most extreme predictions rarely materialize anyway)

I agree that we will inevitably see some inflation creep in. How can it not? The Fed is printing money faster than my local Penny Saver rag. The dollar is anemic and getting kicked in the pants even more. This has been a large part of the recent market run-up and added fuel for the gold bugs. The United States is running up a credit card bill and once countries stop lending to us we will be staring at even more massive piles of debt. The only way to pay our debts will be to monetize them and that will be a tremendous burden on the dollar. Yes, inflation is coming but that doesn’t mean you need to go out and buy food insurance as some are apparently advocating. There are a few more prudent and less extreme solutions to prepare for inflation but please remind yourself that we are actually currently closer to deflation… i.e. This didn’t happen overnight and you have time so don’t panic just yet.

First and foremost, I always suggest keeping sane by simply turning off the T.V., but if you can’t do this, at least have your advisor make sure you are well allocated and consider the following “portfolio inflation-insurance” adjustments:

Hedge against Treasuries-

Bond yields will eventually increase and when they do prices will fall. Going short on treasuries is easily done with an ETF (Exchange Trade Fund) like TBF (ProShares Short 20+ Year Treasury). This investment will do well if there is a run on treasuries. It has a 100% inverse correlation to the Barclays 20+ Year U.S. Treasury Bond Index. TBF should be a huge winner in the next few years. I rarely take bets or go short for clients on something going down but in this case the writing is on the wall and here’s a fantastic way to play it smart. TBF currently trades at $43.50 and could easily trade over $50 in the next 6-12 months. The following 1 year chart shows how it has fared relative to the S&P 500:

Increase your International Exposure-

All of my clients have a healthy allocation to international companies. Over half the world’s investing opportunities are abroad and as we continue to see a flattening globe with interlinked economies, you are missing the boat if you don’t allocate accordingly. I am increasing my standard percentage over the next year to compensate for a weakening dollar. Bulk up your international mutual funds or ETF’s like EFA (iShares MSCI EAFE Index that tries to mirror the European, Australasian, and Far East markets). If you have conviction in a specific country, like Canada for example, but want to avoid the pure risk of owning an individual international company, consider buying an ETF like EWC(iShares MSCI Canada Index Fund)

Lastly, for you domestic stock hounds, increasing your exposure overseas can also be done by buying U.S. based multinationals that do huge amounts of business globally. There are several Fortune 100 companies that make money for you when the Euro beats the dollar. All things being equal this is a no brainer.

Buy Treasury Inflation Protected securities-

Again, by using certain ETF’s you can efficiently allocate a portion of your bond portfolio to hedge against inflation. I typically recommend buying TIP (iShares Barclays Treasury Inflation Protected Securities Bond Fund ) for most clients. By owning this investment you basically have an instrument that adjusts for inflation and a weakening dollar. While you hold TIP for a hedge and some potential appreciation, you are also currently rewarded with a 2.757% yield.

What is your cash paying you at the bank? Speaking of cash…that would obviously be the last thing to hold in a period of increasing inflation. In this scenario, the money you have today is worth far less than what it will be worth tomorrow.

Go ahead…buy some gold (GLD) as a small inflationary hedge but don’t cash out your entire portfolio because some guy on the boob tube told you to. Please don’t stock pile your pantry either; unless you plan on donating some food to those who are less fortunate during the upcoming holidays.