Asset Allocation and Bill Gross Weigh’s In

I’m in my office after the market close on Wednesday (a 500 pint drop) listening to yet more technical experts on CNBC. What strikes most about this particular panel discussion is that all of these people are traders; hence their time horizon is very short. One gentleman noted that he is really only interested in what happens this week. He admitted that there may be longer term value in the market but he really never gives that any thought. The other big discussion is that hedge funds continue to be forced sellers of all kinds of assets, including stocks. Keep in mind that these people have no choice; they are forced to sell because they borrowed money to buy the assets and/or (usually both) the investors in the fund are demanding their money back. The discussion did eventually turn to what the individual investor should be doing. After looking at each other for a painful few seconds they all pretty much agreed, nothing. Because if you do, you have in fact become a trader not an investor and this is a very dangerous market in which to trade.

I’ll reiterate again that, provided you are comfortable with your assets allocation, you should not go to all cash. There are two reasons for this 1. Cash is a lousy long term asset, particularly in an inflationary environment. Make no mistake, the actions taken by the Fed and Treasury are exactly what should be done but in the long run they will be inflationary. Right now we are in a deflationary environment and the Fed’s job should be to act as a counterweight (i.e. feed the system money). 2. The people whose opinions I trust now agree that financial Armageddon or a second Great Depression is off the table. This means that this is a good old fashioned correction caused by recession fears and exacerbated by the forced selling and deleveraging of hedge funds and consumers. What this means is that when the stock market turns back up it will do so quickly and unexpectedly. If you miss even one or two of the best days it will be too late, you will have destroyed your future return and further damaged your retirement funding.
I will also add that I do not know when this will occur. I also don’t know if we go lower first. It’s not my business to try to predict short term moves in the financial markets. Here’s what I do know. The S&P 500 is now off somewhere around 40% from its high in 2007, and only 8% higher than its low in the last recession in 2002 (only 6 years ago). I pretty much own the same things I did then. I was comfortable owning them then and when their value increased to the market high last year. Do I have every confidence that in the next five years those same assets can repeat that, - yes. Do I need the money in the next five years, - no.

Given the risk in trying to trade or even rebalance in this environment, I’m going to sit tight and advising my clients to do anything else would be a disservice to them and their future wealth. That said, if you are having trouble sleeping over all this or your short term financial picture has changed, you need to sit down with your financial advisor and reassess your risk tolerance and asset allocation. No advisor can read your mind and we really do try not to take actions that make our clients uncomfortable.

One last item below is a link to PIMCO’s Monthly Market Outlook. Bill Gross is probably the smartest bond guy on the planet. PIMCO’s take on the current situation is recession not depression then recovery then inflation. Enjoy the read and bookmark the site.

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/Investment+Outlook+Gross+October+2008+Fear.htm
Greg Staub, CFA