Dan’s Blog

Asset Allocation: 2012

Dan Calandro - Sunday, January 29, 2012

When you look around these days and assess "the market’s" condition it really does seem like déjà vu all over again.  Monetary policy has been cheap and easy for way too long, fiscal governance is irresponsibly spending, and the underlying economy is overinflated and fragile.  It’s all way too reminiscent of January 2007 – but without the "boom."

The housing boom was on its last leg in January 2007.  Remember that in February of that year HSBC warned of larger than expected defaults on subprime mortgages.  Soon after that banks began to fail all over the place, with seemingly every other one was scrambling to raise additional capital.  The housing boom went bust more than a year later in the fall of 2008 – leaving legendary Wall Street firm Lehman Brothers in the dust of its ruin.  After more than 100 years in business, Lehman symbolized the fate of what was a horrible market crash.  

But today we’re not talking about banks failing or subprime mortgage failures.  Instead today we are talking about countries going bankrupt and civilizations on the brink of calamity.  Will they all make it though the storm?—And if not, which ones will fail – and how bad will the damage be?  

Like in 2007, 2012 is the time for investors to play defense and position their portfolios for the buying opportunity that is sure to come.  Market fundamentals have been pointing to such an opportunity for some time, and the evidence keeps coming.  In times like these, what your portfolio needs most is smart design and superior construction.  

What I mean by smart design is an asset allocation that will bode well in the current Market condition and for the five years beyond.  Your approach to investment should have this wide view and long-term perspective; otherwise it’s easy to get lost in current daily events, which then makes it easy to make bad investment decisions.  

There’s simply no reason for that.  

Like in 2007, your 2012 portfolio allocations should reflect these undeniable truths: Cash is king, Gold is queen, exposure to Stocks should be Small, and Bonds are for Gamblers.  (For more explanations to these please refer to chapters 6, 7, and 8, of LOSE YOUR BROKER NOT YOUR MONEY.)  

That said, below is a conservative portfolio allocation heading into what I expect to be a rocky road in 2012.  

Conservative

Asset Class:

 %~

Cash

75.0%

Gold

15.0%

Stocks

10.0%

Bonds

0.0%

Total

100.0%

Now, I know Wall Street brokers hate when investors have money sitting around on the sidelines idle and "not earning" money.  What a load of bull.  

They say that you have to be fully invested to capitalize on long-term stock market returns, that total return relies on 100% automatic reinvestment of dividends and interest, and that broad market diversification through a blended basket of several different types of mutual funds are required to minimize stock market volatility and maximize long term investment returns.  

Nothing can be further from the truth.  

Recall, first, the well known fact that the vast majority of mutual funds fail to outperform "the market" consistently over the long-term.  If one mutual fund can’t do it – then 4, 5, or 6 have even less of a chance doing so.  It’s too much of too much, and impossible to produce above-average investment returns .  This, as we know, is required to actually make money with investment.    

So I say don’t buy into their hype.  In times like these, all you need is smart design, superior construction, and the Lose Your Broker way.  It really is that simple.  

To show you an example of how such a portfolio would perform in times like these I’d like to offer you a KISS as a gesture of good faith.  I call it: the Keep It Simple Stupid portfolio – KISS, for short.  

In the KISS portfolios to follow, their performance trend does not recognize dividends or interest earned.  Call that unrealized vig.  Gold investments are shares in the gold SPDR traded under symbol GLD.  The stock portfolio is the 15-51 Indicator, which as we know, is not a great portfolio but an above-average one.  It was bought and allocated on the first trading day in ’07, and therefore signified as 15-51i ’07.

The KISS portfolio, with smart design and superior 15-51 construction, is a prudent way to approach the next five years – just like it was in January 2007.  (See previous blogs for further explanations.) Here’s how that portfolio performed in over the past five years.

KISS-Conservative

Thanks to smart design and superior construction volatility has been virtually removed from this KISS portfolio while it produced a robust 28.4% percent return – strongly outpacing the DJIA which gained a lackluster .3% gain.  The KISS portfolio outperformed with a 75% cash allocation, mind you, and turned the $50 thousand initial investment into $65 grand in a terrible five year span for "the market."  

That’s smart design and superior construction.  

This is how I define "conservative" but only you can define your investment posture.  I expand my definitions of investment posture this way:

Conservative

Moderate

Aggressive

Asset Class:

 %

 %

 %

Cash

75.0%

60.0%

45.0%

Gold

15.0%

25.0%

35.0%

Stocks

10.0%

15.0%

20.0%

Bonds

0.0%

0.0%

0.0%

Total

100.0%

100.0%

100.0%

Here’s how these portfolios performed over the past five years.  

KISS-5Yr

Regardless of their make-up, the smart design and superior construction method produces more return with less risk – contradicting another one of Wall Street’s tried old mantras that only more risk produces more return.  So not true.  

I’m a Keep It Simple Stupid kind of guy.  There’s no reason to over-complicate things here.  That’s Wall Street’s thing.  Not mine.  The Lose Your Broker way is a quite logical approach.  Above-average construction and smart design will always outperform average construction and fat and lazy design (speaking of the portfolio your broker threw together for you.)  Call me crazy but it makes total sense to me.  

Lose Your Broker is the place for efficient construction and high performance.  It’s also a place where past performance is indicative of future results – because markets act according to the way they are built and managed.  To understand markets and their motivating factors is to know the course of investment.  To understand markets you must understand the governments that control them.  

Governments inflate markets all the time to suit their political agendas.  Inflating markets to the brink of collapse takes a bit of time, like the last time with the housing-boom.  President Clinton ran on a platform that included making housing more affordable to lower income people via subprime mortgages.  What gained steam in the 90’s collapsed years later in the fall of ’08.  

That’s why patience and a long-term perspective are required to succeed with investment.

Acknowledge that we are making the same mistakes today that we made during the run-up to the last meltdown.  But this time it’s not just the housing market we are inflating, not just the green energy market – but the entire market!

More than ever before, today the government is recklessly throwing money around to serve their own political agendas – without regard to profit.  That’s politics and negligence.  Not investment.  Herein lay the problem with an overactive and imposing government force in the Market. It changes their purpose and causes them to become disjointed and misguided – because they operate for politics instead of profits.* 

That’s bad for markets and investment.  

Stock market corrections usually follow and extended period of inflation and monetary failure – a.k.a. failures in government management.  Sometimes economic balloons are easy to see, like the tech-boom and housing-boom, and other times they’re not.  Today’s balloon is a different sort of beast.  It’s not creating mass market wealth like most yet it is so more misguided.*  

Today a major debt balloon exists, caused by a prolonged period of monetary and fiscal failure that will end in a much more severe fashion than the last unfortunate circumstance.  Why? 

Because all over-inflated balloons bust.  And this one will too.  

The time of bust is the time to invest in above-average stocks trading at discounted prices because the American Market will never crumble.  To do so you need cash and courage.  

Prepare your portfolio now and KISS your broker good-bye. And let me know if you need help.


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