Asset allocation in a down market

[masayako]

Hi friends,

First, I’m melting in North County here!!! The heat is killing my wife & me. Anyway….

I’ve been learning so much ever since I joined this site. Thanks SO MUCH, especially, Powayseller & Rich.

Knowingly that the housing market is facing a sharp downturn and, from various indicators, a possible U.S. recession. Do you guys think this is a good time to invest in Stock and Bonds, mutual funds? Of course, except REITs and Real estates related companies.

What is your plan in terms of investing the money you have at hand?

Personally, I’ve recently max-out my IRA annual contribution (5%) and save a bunch in CD (50%), and doing some stock & mutual investing with a local full service brokerage (40%) .

The rest of the 5% is for emergency purposes. I’m not exactly seeking which stock to buy, simply want to know what is your plan in terms of asset protection/allocation.

Happy HOT Saturday!!

Regards
Masayako

[powayseller]

Search the forum archives for my lengthly posts about the stock market, and the recommendations made in the newsletters to which I subscribe. I got out of the stock market because it is overvalued, and the next recession will reduce earnings which will cause another sell-off. I sold my Vanguard index funds and various stocks, right before the first 2% downturn. The timing was luck. I wanted to be out of the stock market well before the recession. We are 95% cash. The only stocks I own are BRK.B, and COP and a canadian lead mining company (maybe a bad decision). I would like to buy gold, and am waiting for a price drop.

If you are bullish on stocks, explain your reason.

Treasury bills are the safest way to hold cash, and CDs are good too. They pay over 5%.

This is the time to preserve assets, not to hope for big returns. Keep some money, maybe 10% to invest in stocks, gold, or whatever you deem a good play.

In a downward moving stock market, what is the chance that your stock will move opposite of the entire market and go up?

Some people here are bullish on commodities, but in our discussion yesterday at the meetup, several members told me that commodity prices are high only due to high US consumption. In our next recession, we will buy less from China, China’s demand for commodities will fall, and commodity prices will revert to the mean.

A real good book about the dollar weakness and commodities and money supply is Richard Duncan’s The Dollar Crisis. The most important thing I learned in that book, I have not read anywhere else: he has Federal Reserve and IMF data, about a hundred tables of graphs of this stuff, and he shows that commodity prices and stock markets around the world fell sharply due to the 2000-2001 weak US capital-spending led recession. He says the next recession will be a consumer spending led recession, and that makes it much stronger, since it is 70% of GDP. Commodity prices will fall off the cliff then, he says. Gold excepted. Duncan was an IMF consultant, so he presents original insight. I read the book twice, and it is heavily underlined.

Now, how do we make more than 5%, with low risk of losing our principal? That is the question, and I’ve asked this many times on this forum. Let’s see what answer pop up today.

[technovelist]

While I agree that this is a time to be very conservative, and that avoiding the stock market is an excellent idea, I don’t agree that one should keep a lot in CD’s or other US dollar-denominated accounts.

The problem is that the dollar is extremely vulnerable to a very large decline, due to the ridiculous trade and budget imbalances, which are closely related to the absurd mortgage and other debt loads in the USA.

So, what to do? Commodities in general are very risky, to be sure, as most of them depend on continued economic expansion in China and the East. However, there is one “commodity” that is different.

I believe a prudent course is to have a significant portion of your net worth in gold. As pointed out by Alan Greenspan (and many others), it is the only money that is acceptable in any circumstance. Every variety of paper “money”, such as the US dollar, has a finite lifespan. Eventually it disappears, taking the wealth of its holders with it. The same is not true of gold, at least in the past 5000 years. That’s a lot better track record than paper.

[privatebanker]

Masayako,

Sure people can give you ideas on this forum but if you are truly serious about establishing an asset allocation plan, go see a professional. A Certified Financial Planner with a lot of experience can set you in the right direction. Interview 2 or 3 of them and make a decision from there. Avoid those that jump to a product solution upon first meeting them and also be cautious of the insurance products some may offer.

Good luck!

[waiting hawk]

technovelist had a great post,

I have all my money in ING Direct CD, the first day the FED drops rates to save the bubble (economy not just housing) I am jumping into an FDIC foreign CD and gold. Helicopter Ben does not care if the dollar drops as much as saving an economy that should’ve had a harder recession after the dot com bust. They just postponed it.

My website tracking Temecula and South Riverside County

[masayako]

privatebanker,

I did talk to several finanical planner, most of them are too bullish about the stock market and their privately traded funds. To name a few, I have discussion with UBS and Edward Jones, they sound quite similar to mortgage brokers.

Of course, I’ll continue to search for my long term investment planning. In the short term, keeping money in 5.5% CD is the best I can think of.

powayseller,

Personally, I have become extremely bearish on stock/mutual funds. Most of the once I have keep track of is turning ‘red’, very red. IMO, too many negative components that could trigger a major recession.

To name a few:

– housing burst
– ATM style ARM resets
– Fannie & Freddie becoming Enron
– huge trade deficits
– insane govt budget spending
– American’s spending style
– People not having enough savings in the bank
– inflation and deflation
– war in Mid East
– insane oil price
– Big cap companies job cuts
– Lacking of solid alternative engergy plan (continue to depend on oil)
– “Bush”

I agree that getting into stock at this point may not be a wise decision, that’s why I want to see others’ opinion?

By the way, can you tell me which sites you used to research gold?

masayako

[technovelist]

What exactly do you want to know about gold? There are a lot of different ways to consider gold, including:

Why it is a good thing to have in your portfolio
Why governments don’t like it
How to buy it
When to buy it
Where to buy it

and I’m sure I’ve left out a number of others.

If you could be more specific about what you want to know, I can probably provide some links.

[VCJIM]

Hawk,

If you’ll please excuse my ignorance…what is an FDIC foreign CD? It sounds like an oxymoron! Could you point me to some places to learn about them?

Thanks!

[powayseller]

Everbank, and presumably ING Direct, are FDIC insured, yet let you buy foreign currencies. So you can buy euros and Swiss francs, FDIC insured.

I am also scared of holding all my money in $$s, so I’ve been asking people here which currency they think is stronger. I’ve heard pro-euro and con-euro arguments, and enough opinions to have immobilized me with indecision.

Probably the best strategy is to diversify among various currencies of governments with solid trading programs and strong budgets, and precious metals.

theplayers told me yesterday that he has most of his cash in Treasury bills, since that is more safe than banks. He has some in CDs, and I am going to move my cash to Treasury bills in September, when my 4 months are up.

But please don’t copy what I do. I have no crystal ball either. I could be totally wrong and lose all my money and miss out on big run-ups in stocks. Or my euros that I plan to buy could lose against the dollar, if we have a dollar rally.

Gold: Check out GLD, the gold ETF. Read about it at Euro Pacific Capital, kitco.com, and Zeal. I subscribe to Zeal Intelligence, and that’s where I got the COP idea. They have done well on their recommendadtinos, bec. they were early on the commodities investing.

I subscribe to Yamamoto Forecast, which is $350/year. Very pricey. Every month, I get a typed newsletter. typed. The guy is not even on a website, but he is one of the best market traders, and that’s why I subscribe. Anyway, he has been telling his subscribers to be 100% cash, 0% bonds, 0% gold. The reasons are given in his newsletter. He recommends CDs for the cash part, and I don’t know why. It seems Treasury bills are safer. I don’t know why he doesn’t recommend euros or yen or swiss francs. If the dollar loses value, aren’t we better off holding euros?

If you want to know how clueless our senators are about the problems of our economy, watch Bernanke’s testimoney, and their Q&A, on C-SPAN video. From this, I can tell that nothing will ever change about our deficit and manufacturing outsourcing. What we are discussing is very real, and not something we are just making up. It is real.

[theplayers]

I too believe the stock market is headed for a recession led downturn over the next few years. I agree with many here that being conservative in the present economical environment is not a bad idea. I view my “liberated equity” as still home equity. In other words, if I still owned a home, would I take some of the equity out to invest in risky things? Probably not. Most who have bought a home in the last two years here in SD have not seen any appreciation (if they were to sell now), so gaining 5% on CD’s or Treasury bills is not so bad.

One of the reasons I like treasury bills is because the gains are not taxed by California. When you take that into account, the return is better than the highest paying CD’s in many cases. Also, I feel a little safer with t-bills. I do have some in CD’s too, however. I think spreading it around a little is safer than having it all in one place.

I can’t remember who said this, but it’s something like “in bad economic times, it’s not how much money you make, but how much money you keep”. In other words, if things really do get bad over the next few years, those who manage not to lose will be far ahead of the rest of the crowd.

As always, please don’t take any of my comments to be investment advice 🙂

[VCJIM]

Thanks PS, greatly appreciated. Most of mine is in Money Market, with 10% in the Japanese stock market, which I’ve lost $6,000 so far this year. Can you say dummy? Anyway, I’m as worried about the dollar as you are, I wish we had confidence in some alternatives. That’s why the FDIC foreign CDs caught my attention.

[powayseller]

theplayers, why are you 100% in US dollars?

[desmond]

How is a T-Bill “safer” then a FDIC CD? Both are backed by the US Government. T-Bills are actually dropping a little and CD’s are going up. Schwab is a excellent place for both. You can buy T-Bills at Scwhab (no commission) just as you would from treasurydirect.gov.

[masayako]

technovelist,

Thanks. Please help me with these questions to begin with.
How to buy it?
When to buy it?
Where to buy it?

Regards,

masayako

[technovelist]

1. How and where to buy:

The easiest place to deal with that I’ve found is Kitco. Their web page is Kitco.com, and you can open an account online.

You might want to shop around to see if you can find a much lower price, but I haven’t found that they are often undersold by a significant margin.

2. When to buy:

Now.

[Author]

Posts