Thinking ahead - planning your investment game

The last time I wrote, it seemed like the global economy generally, and the American economy in particular, was in for a serious bout of greacession.

However, the coordinated global attack on the economic slowdown and banking sector crisis appears to have had some effect with, most importantly of all, confidence being restored. That's not to say there won't be some washouts in the road ahead, but most commentators seem to agree that "The Great Depression, Redux" just won't happen at this time. Opinions on the severity and remaining length of the recession in front of us, and the inflation to follow (or not!) now seems to be the subject of debate, rather than the collapse of the economic system itself.

With all that in mind (or not) and remembering that the most important aspect of investment is the right temperament, here is an investment clock that can suggest various investment timing to be had in the cycle in front of us. Whereas it can often be quite difficult to tell exactly where in the cycle we are, at this time it is unusually clear, at least to the extent of knowing that we aren't in the boom phase, nor have we really reached recovery yet. We appear to be, undeniably, in the recession phase at this time.

Therefore, if you like sector rotation and feel you can use it to your advantage, then this Merrill Lynch clock should be very handy at this time.

Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!


JW

The Confused Capitalist

Investment Cycle clock

I thought that this graphic, by Merrill Lynch, was worth looking at in terms of where they see the economy in the cycle, and the type of investments they generally see as outperforming during any particular part of the cycle.

The other thing I thought I might try taking a stab at is how long each portion of the cycle typically lasts. Based only on my observation over time, I might suggest that the cycle has roughly 3,4,2,1 counts. My (un)educated guess is that the recovery portion usually is 3 helpings of time, the boom is 4 portions of time, the slowdown is 2 portions and the recession is 1 portion of time.

Using something like this clock may help you to time your type of investments a little better.

Hat tip to the Big Picture for this worthwhile graphic and also to his continuing coverage of the housing situation. Unlike many analysts, Barry Ritholtz has figured out where that particular train is headed (and it's not to the "Happy Days Are Here Again" station, just yet).



JW

The Confused Capitalist

I love you, I really, really, do

Are investors too much in love with stocks these days?

The reason I ask this question is obvious, given the recent Dow Jones records, but my interest was piqued by accidentally tapping a link that took me to the msn money web-site.

The so-called "Stock Scouter" on the site purports to show that in three categories of a) sector type, b) investing styles, and c) market capitalization ranges which is "in favor", "neutral", or "out-of-favor". Guess what?!

In all three categories (sectors, styles and capitalization ranges), there isn't a single thing that is "out of favor". Is this one of those contra-indicators, suggesting that the market is priced to perfection, with nowhere to go but down?


JW

The Confused Capitalist

Climbing back into the market

Although many investment types warn against market timing, I'm going to suggest that it is a small but important part of any fairly successful investor's repertoire. Basically - at the most correct level - it involves selling assets when they are above a realistic value, and being slow to redeploy proceeds when few or no bargains can be spotted.

Once cash is in hand, however, you should prepare a plan on how to redeploy those proceeds, when "the market" you like (through an ETF), or a particular stock you like, is marked down to the right level.

And just like someone picking his or her way up or down a rock, this involves some careful consideration. For example, since I believe that the market is poised for a fall, I've constituted a plan whereby I step back into the market at pre-determined levels. In some cases, this might be when a specific stock or ETF has hit a certain level, while in others, it's just based on a broader market decline.

The point is, is that I haven't selected a single entry point as the time to redeploy my idle cash back into equities. I have a phased plan. For me, my re-entry points are (generally speaking), a three-tiered structure, using a point around a 15-20% decline in the S&P500 for re-deploying about 50% of my idle cash, and two further points at 25% and 30% declines for the balance.

While some of these points might not be reached, at least I've made a plan on how to maximize the inevitable upswing. And of course that's not to say I'm out of the market entirely - one way bets using all of one's assets aren't a particularly prudent way to invest, in my opinion.


JW

The Confused Capitalist

Fear is Your Friend: Embrace It!

The other day I entitled an article “Fear: an Investors Biggest Friend & Worst Enemy” and it occurred to me that I’d said why it was an enemy, but didn’t say why it was a friend. The reason is, if you learn to use your fear – which generally occurs after an extended market decline – as a contra-indicator.

In other words, you recognize the fear, but also recognize that a market decline generally represents an excellent opportunity to increase your long-term rate of return. I’d read that an analysis determined that if you added 10% to your stock portfolio after every 20% market decline (an opportunity that admittedly doesn’t happen very often), that you would increase your overall rate of return by 2% annually.

While 2% doesn’t sound like a lot, it has large implications over a long investment horizon. For instance, if you think your return rate is likely to mirror the long-term average of the stock market (large stocks: 10% or so), then increasing your return by 2% annually means this over a 25 year period:

Instead of a $100,000 portfolio being worth under $1.1 million in 25 years, it is instead worth over $1.7 million. What a huge difference when using fear to your advantage.

So this is how to turn fear to your advantage – by using the Warren Buffett saying … “We seek to be greedy when others are fearful, and fearful when others are greedy.”

Fear – your best friend.


JW

The Confused Capitalist