Current Tactical Allocation Considerations ( Summer 2010)

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Milyunair's picture
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Joined: 2009-09-25

What are some relevant ideas for this market and portfolios? At this point for summer, I'm generally holding the fixed and equity percentages (having tightened up the bond quality and durations in anticipation of eventual interest rate increases). Looking at adding or increasing basic materials (sector ETFs) at the equity allocation to hedge potential inflation. Something to be proactive and talk about with clients, while doing the portfolio rebalance.

I am legend's picture
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Joined: 2010-03-04

Inflation??  I don't think you will have to worry about inflation for a long time if this debt crisis keeps spreading, deflation will be the problem.

B24's picture
B24
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Joined: 2008-07-08

IMHO, there are two ways to go....one is go real simple, real low risk....muni's, short duration bonds, safe stuff.  If you are real concerned about volatility, collecting a safe 2-4% for a few years is not the worst thing that can happen.  Inflation is not part of the picture over short time frames.  The second way is waht I call "extreme" diversification....look at 12-14 asset classes (and not small, medium, large, value, blend, growth), including commodities, real estate, emerging market bonds, developed market bonds, TIPS, emerging market stocks, timber & natural resources, small caps, cash, treasuries, high-yield, etc.  But allocate evenly among all asset classes...5-10% in each class.  Don't overweight much.  This hedges your bets.  But it's important that you NOT do the style-box thing, as most of those boxes are so highly correlated, that it does not really create any diversification.  You have to use asset classes that have as little correlation as possible.  Now, you are not going to kill it this way, and it will not completely defend against another 2008, but it will give you better returns than the "safest" investments right now, while participating in a good percentage of market growth, and also insulate against market/region specific risks.

Milyunair's picture
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Joined: 2009-09-25

I like the second way, and I agree, the whole style box thing is probably more of a mutual fund marketing focus. I look at the total world population, the fact that most growth is outside the U.S., and growing demand for basic materials, energy and such - when I think about inflation. That, and the fact that the progressives are borrowing and printing money to the point where the relative cost of materials and energy will likely be inflated here in the U.S. Just as there are "limits to growth", in the diminishing returns sense, there are limits to debt. The U.S. will try to collect more taxes, but that is really just shifting money across the balance sheet, in terms of the relative strength of the dollar, with regards to buying basic commodities in the global market. Maybe inflation isn't a problem right now, I think that can or will change pretty quickly, if you look at "sectors" ( Health care, energy, education, materials.) Common sense, in the way that a lot of folks are wanting to own gold - in a world that is getting more comlex by the minute, in the back of your mind, you know that ownership is the only thing that can keep you competitive in a relative economic sense.

navet's picture
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Joined: 2010-02-25

Mily, you should isten to the George Soros lectures...oops...that's right he's a progressive....hmmm...guess you should determine your investment strategy with help from glen bicker....BTW, how did the conservative strategy work in the '30's? Face it, JM Keynes was the chief world economist during the greatest economic expansion in history...and he was flaming liberal.....and didn't "reganomics" fail? How about just leaving politics in the dungheap where it belongs and keep focus on investment strategy and economics.

Milyunair's picture
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Joined: 2009-09-25

Ridiculous idea. I don't know, after Jimmy Carter, did Reagoneconomics fail before or after the fall of communism. Is economic liberty really a conservative idea? Or is it progressive to lift all boats with the free market?You're seeing the greatest economic (technological, cultural) expansion in history right now, it's just not happening in America.Since government sets economic policy, politics matter. If you work in the equity markets, and you're not worried about things like exploding public debt or lack of job creation by small business, there's probably not much to talk about here. Increasingly, bonds are bad debt, stocks are good debt. Basic materials and energy are stocks, but more like concentrated hedges against the negative consequences of somehow making it a virtue to be a lender (or borrower) instead of an owner. America got fat and stupid, and now we are borrowing to realize the progressive dreams of a selfish generation of baby boomers. It's all connected, almost too painful to view if you want to live in bubble, go ahead and try to separate the economics of consumption from the politics of wealth redistribution. Gambling, like market timing, and pretending like you are good at it,  is just a symptom of the larger problem. Maybe you can even make a good living for yourself, but you're not really adding and economic value. I just happen to think that will be highly inflationary for the U.S. - because while we stand still (slow growth) - others are growing faster. It's a relative thing. Mark my words.

Incredible Hulk's picture
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Joined: 2006-03-24

B24 wrote:If you are real concerned about volatility, collecting a safe 2-4% for a few years is not the worst thing that can happen.   Yes I'm cherry picking and yes I'm taking out of context, but when the S&P crosses 1500 in "a few years" 2-4% will likely cost you a client regardless of how risk averse that client claims to be today(Excluding your coupon clipping Muni buyer that earns 8% tey).

I am legend's picture
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Joined: 2010-03-04

Zero coupon taxable muni's look great for IRA accts right now.  I just picked up some today with a YTM of about 6.7%.  Set it and forget it......

B24's picture
B24
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Joined: 2008-07-08

Incredible Hulk wrote:B24 wrote:If you are real concerned about volatility, collecting a safe 2-4% for a few years is not the worst thing that can happen.   Yes I'm cherry picking and yes I'm taking out of context, but when the S&P crosses 1500 in "a few years" 2-4% will likely cost you a client regardless of how risk averse that client claims to be today(Excluding your coupon clipping Muni buyer that earns 8% tey). Three things:1. That's not what I am doing, it's what I gave as an option.2. That's assuming the S&P grows 50% from it's current level "within a few years".  If the U.S. Market goes up 50% in a few years, I will bark like a dog and lick your arse.  For the record, I consider a "few years" to be 3 or less.  There will be no arse-licking beyond that.3. That's assuming your clients can all handle the volatility.

Incredible Hulk's picture
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Joined: 2006-03-24

Should I go back and highlight the first part of my post about cherry picking?  And for the record, I have very strong expectations of 1500 on the S&P by the end of 2013. 

navet's picture
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Joined: 2010-02-25

Actually, borrowing money to pay for a defense build-out is how the US defeated communism. The USSR didn't have the financial infrastructure to keep up with american defense spending(all with budget deficits). So, it was actually Keynsian economics that defeated communism.

Milyunair's picture
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Joined: 2009-09-25

Well, Navet, I hope you're right. What we are borrowing for to stimuluate the economy - is the future, our future. American companies are sitting on lots of cash and are profitable. The economy is growing at about 3.5%,  much stronger than Europe but slower than Asia. As the recovery continues, at some point, companies should have to hire. We have lots of space, people and desire to create wealth. On the flip side, the baby boomers are getting old and many want to retire. I hope we are not borrowing to fund entitlements. Unfortunately, most of the budget is entitlements, and the debt is exploding. Our future includes a scary debt to GDP ratio that will have to compete in the global economy. We don't get to be different, just because we are Americans. When you debt to income ratio sucks, it costs more to borrow and your debt  is worth less. That gets put  alongside your Keynes theory. Best case (in terms of the free market) we are looking more like India. Worst case, we are looking more like Greece. If Americans wake up a little, our " investment" in Obama may be valuable. In terms of the equity markets, and the disconnect between the average person's outlook vs. economic reality, I guess I'm optimistic, and in that sense, maybe the mistakes made up until now can be redirected.

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