How Can We Be Smart and Stay Invested?

Billionaire/loudmouth/genius Mark Cuban recently offered keen insight into how the stock market is a dangerous place, especially for average investors.

Basically, he said we should be cutting back our exposure to stocks and increasing our cash, and paying off our debts.

But he also admits he just doesn't know when things will change for the better.

He is right to say things are difficult, and he may be right to say the system is tilted toward the professionals. But it is not hopeless, and it is not time to head for the exits. I think long-term investors have a great chance to grow their wealth, instead of merely preserving cash, if they "stay invested". But we can still heed Cuban's warning to keep some "dry powder"--that's the great thing about how I am investing for my clients.

For the record, I am pessimistic about the U.S. stock market and the U.S. economy in general, but I remain optimistic about long-term investing, especially for investors willing to go around the world to allocate their portfolios.

I have also regularly, and in recent years quite significantly, adjusted the portfolios I run for my clients. In particular, here are two major changes in the last three years to how I do business for my clients:

* I have increased the cash/money market allocations.
* Since mid-2008, I use mutual funds and managers that have global/flexible mandates.

Unlike typical portfolio managers and mutual funds that are required to stay fully-invested in specific areas of the market, these "global/flexible" managers can get out of weaker areas and into stronger areas, AND they can stockpile cash. The ones I use all have outstanding track records and consistently out-perform benchmarks by a lot, and with a level of risk that is worth taking for the better performance.

I still use a long-term "strategic" asset allocation in order to structure portfolios with the overall risk/reward balance suitable for each client. But the portfolio components have a lot of flexibility, so while I might recommend a strategy that calls for 5% in cash and 15% in bonds, the actual portfolio could have a lot more of both, depending on current market conditions.

Case in point, take my "moderately aggressive" mutual fund portfolio compared to a similar 80% stocks 20% bonds/cash portfolio of highly-regarded, widely-touted index funds from Fidelity:

ALLOCATION AS OF 8/31/10
Cash = 25% vs 9%
US Stocks = 27% vs 39%
Foreign Stocks = 23% vs 39%
Bonds = 15% vs 13%
Alternatives = 10% vs >1%

RETURNS
10 yr avg return = 10.5 vs 1.2
5 yr avg return = 8.9 vs 1.3
3 yr avg return = 5.9 vs -6.5
1 yr ret (thru 8/31) 9.9 vs. 3.1
last quarter = 2.4 vs. 1.2

The key is two-fold:

* My guys don't mimic indexes but, instead, carefully select stocks, bonds and alternative investments, and they employ a defined sell-discipline.
* My guys raise cash when they don't see anything better to buy, and they deploy cash into concentrated positions where/when their conviction is highest; they are patient and disciplined.

With the right tools and motivation, I have found ways that work better than just staying on the sidelines, better than generic "indexing".

A better portfolio, even for this difficult time, is out there, folks. Find it yourself, or get a pro like me to find it for you.