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

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

Santa Claus is coming to town ... make your list too!

You better watch out, you better not cry, ... yada, yada, yada ... he's making a list, and checking it twice, yada, yada ...

Time to make your list too! As regular readers of this blog are well aware, I think that some sort of correction is in the offing, if not now, probably within the next six months. I remain skeptical of whether current market levels can be maintained in what I see as signs of rising inflation, which must ultimately be met by rising interest rates. Against a backdrop of PE ratios at or above historical norms, I believe that this sets the stage for a market decline.

So while I've raised some cash in my portfolio, I happily await the correction. This should give me the opportunity to purchase some of my desired stocks and ETFs at nice discounts. I'm hoping for some of the following top-quality names to drop far enough for me to purchase nice big chunks that'll fuel my portfolio for awhile to come. Some of the blue-chip names I'll be following include:

• Coke (KO)
• Pfizer (PFE)
• Brookfield Asset Management (BAM)
• Wells Fargo (WFC)
• Goldman Sachs (GS)
• Procter & Gamble (PG)
• Manulife Financial (MFC)
  
  

and a few Canadian blue-chip stocks I'll be keeping my eye on ...

• Bank of Nova Scotia (BNS)
• Power Financial (PWF)
  
• TSX Group (X)
  

and I'll also be looking for deep, deep discounts in some emerging markets, including Brazil, South Korea, Taiwan, and Russia.

So, during this phoney war, don't waste your time either. Make your list and check it twice too.



JW

The Confused Capitalist

ONE of you will live longer than you think: Staying in the Stock Market

A recent posting by my internet friend, Random Roger, pointed to a recent Wall Street Journal article that postulated that long-term interest rates might be held down by the number of aging boomers shifting a portion of their portfolios towards bonds and CDs, and away from the stock market.

While this might be true, only the uninformed pension-aged couple will do anything more than a modest move away from the stock market. For only through long-term growth - perhaps using quality divided paying stocks - like ones I recently highlighted over here - can you expect that long-term growth and growth in dividend payments be reasonably expected to offset the effects of inflation over a long retirement.

And that's partly because ONE of you will probably live longer than you think. A 65 year old male has an average mortality around 80, and a 65 year old female, 83. However, according to the Society of Actuaries, there's better than 45% chance that one of you will still be alive at 90, and a nearly a one in five chance that one of you will be alive at 95.

Now if you put a lot of your funds into bonds at age 70, then what do you think the chances are that you'll have much left some 25 years later? Unless it was a small (perhaps large?) fortune to begin with. And the averages also hide some other factors - it's reported that blue collar workers suffer 40% higher mortality in the years immediately following retirement, so if you're a white collar worker, you can expect you or your "sweetheart's" chances to survive to be even higher.

So if you're approaching your retirement years, or have already moved your portfolio this way, this is something you definitely should review and reconsider.



JW

The Confused Capitalist

Planning for Emotional Control

We all have emotions - which is great in our personal lives, but doesn't help that much in our investment lives.

In fact, many great investors have stated that being in control of one's own emotions allows one to tread where others fear to go, and to fear to tread the well-worn path. What this means is that the best returns are generally earned when no one is considering that sector/company or timing (due to a recession, for instance), while returns earned when everyone is on the bandwagon, are typically only fair, and often poor.

Fidelity reportedly did an analysis on their then flagship "Magellan" mutual fund, and found that the average investor in the fund typically did much worse than the fund itself. Why? Timing, they found - investors piled more money in after a period of strong returns, and tended to pull more out after a period of weak returns.

So we as investors want to avoid the same fate. One way to do so is through planning. Make a plan to start the year and follow it. Write down what could cause you to want to deviate from that plan. Then when you are tempted to change your investment strategy, go and review your plan to see if you'd already predicted that could happen. For instance, bearing in mind my own plan for the year (see prior post) and my own personality, I considered that these items could possibly derail my attempts to follow my strategy:

1. The volatility of my leveraged investments might worry me - so just ignore them and remember that volatility is the order of the day with this investment type;
2. Ensure that I have enough money to continue to invest in my small cap stocks - I really enjoy investing in this area, and if I completely exited it, I know I'd get "itchy feet" with my other investments;
3. Trust that the investments based on the "value screens" of others will produce worthwhile long-term results - just as they have in the past;
4. Avoid excessive diversification, bearing in mind that superior investment results usually come from a focused portfolio.

If you read between the lines, you can see that a number of my reminders have to do with the characteristic of impatience. If I can control that within myself, this will personally make me a better investor.

The point here is that we all have our weak points, and if we recognize them, write them down, they hold less power over us. Your weak point as an investor might be the same as mine, or it might be different. As Sun Tzu is reported to have said in The Art of War:

If you know neither the enemy nor yourself, you will lose every battle, if you know yourself or the enemy you may win some battles and lose some, but if you know both yourself and the enemy, you will win every battle.

At least improve your investment "battle" chances by knowing yourself.

JW

The Confused Capitalist

Prepare a Battle (Investing) Plan

As I'd mentioned in my last posting, preparing even a basic investing plan can help to improve your results. Of course, this involves some thought and preparation of what type of investor you are, your age and tolerance for risk, and what you consider acceptable results over time. All of these will have some impact on the type of investments you would like to own.

Generally, the younger you are and longer your investment horizon, the more risk you can be willing to accept. This means that if you're age 30 or below, you should generally be looking to be fully invested in the stock market at most times.

Conversely, if you're 60+, you're probably going to be looking at owning some more conservative investments, including high-yielding stocks, and perhaps some bonds of various profiles. Whatever ... the point is that you spend some time thinking about where you are in your investment life, what keeps you awake at night, and how you think you can best achieve your goals, all things considered.

For instance, my plan this year was a five-pronged strategy and included:

1. Significant exposure to a few select emerging markets through ETFs,
2. A number of leveraged stocks (similar to the types I've written about recently),
3. Continued exposure to the oil and gas theme,
4. An allowance to buy some stocks based on "value screens" produced by others and,
5. Plus an allowance to allow me to continue investing in my favorite area - small cap stocks.

The point here is that I stopped to compare to what I did last year, consider the year ahead and what I think might be favorable themes going forward. While I might tinker with a variable here or there, at the end of the year, I think my themes will have been intact, and I can measure my results on that.

I also took one more step that I recommend for others - I wrote down what could mentally and emotionally go wrong with the plan - and if I have "reason" to consider wholesale changes against my plan, then I can go and read what I've already written about danger areas - thus probably comforting me to "stay the course". While my plan won't fit most other people (we're all unique individuals), doing a plan like this will! Good luck with yours ...

JW

The Confused Capitalist

Have a plan - you'll do better than without one.

Well, our team of four players plus numerous local add-ons eked out a 5-5 draw last night. Although most of the players didn't know each other very well, we all seemed to playing within a unified plan. And that seemed to be, that no one left our zone without being in clear control of the puck. So despite playing against a vastly superior team, we played pretty even against them, and nearly had the game won.

This is similar to investing too - writing down even the basic rudimentary elements of a plan can help you to keep your sense of direction in the face of uncertain markets, and numerous "great ideas" (ie new stocks, which you simply "must buy", today!). Furthermore, analyzing your results against your plan periodically (every year or so), can help you improve on areas you did well, and shore up your weak areas. I'll be discussing this more in the future.

By the way - an unheralded near spiritual event occurred for me - I scored three goals! (If only one of them hadn't been on my own goalie!). Bye for now.

JW

The Confused Capitalist