Wednesday, December 28, 2011

Flex Portfolio Performance Through November 2011

This continues to be a rough year across the global markets.  Given the volatility of the global stock, bond and commodities markets, and the problems in the global economy, I remain strongly in favor of using a global/flexible portfolio and think my Flex portfolio method is the way to go.

So, how did Flex perform?  Not as well as I would like, for the second month now.  I am considering changes:
  • I may replace The Arrow DWA Tactical fund.  It is 1/2 of the "growth-oriented" portion of the Flex III portfolios, and it has been underperforming greatly.  It seems to just miss the boat right now, despite the great track record of the underlying portfolio methodology.  This is likely because it uses an intermediate-term trend-following methodology that really does well over the long-haul but does not react to the kind of short-term volatility we are experiencing now.
  • Ivy Asset Strategy is going to stay in the Flex portfolios, despite being on my Watch List lately.  This fund is the only hedge fund-like component, and I want that kind of guts and flexibility in this portfolio series.  It is invested pretty much fully in growth companies in emerging markets that have had a rough time lately; I am eager to see what happens when that market regains its footing.
What to do?  If I reduce the weighting of Arrow DWA Tactical fund, I will either convert Flex III investors into Flex II (Flex III but without Arrow DWA Tactical), or I will bring on another fund I have identified as suitable.

Here are the performance #s through November 2011:

US and Foreign Stocks 1 month 3 month YTD 2 year 3 year 5 year 10 year
S&P 500 -0.2% 2.9% 1.0% 8.7% 14.0% -0.2% 2.8%
MSCI EAFE -4.9% -5.6% -11.3% -1.5% 10.1% -4.0% 4.8%








Moderately Aggressive Benchmark -2.1% -1.1% -2.7% 4.1% 11.4% 0.0% 4.7%
80 Flex III -0.5% -5.3% -1.6% 6.0% n/a n/a n/a
80 Flex II -1.1% -2.4% 1.2% 7.6% 15.4% 7.4% 11.1%
80 Fidelity -1.3% -0.6% -3.0% 4.7% 11.9% 0.0% 4.8%








Moderate Benchmark -1.7% -0.9% -0.2% 4.5% 10.3% 1.8% 5.2%
60 Flex III -0.9% -5.0% -1.2% 5.8% n/a n/a n/a
60 Flex II -1.3% -2.8% 0.9% 7.0% 14.1% 7.6% 10.5%
60 Fidelity -1.1% -0.2% -0.9% 4.8% 10.7% 1.4% 4.9%








Moderately Conservative Benchmark -1.3% -0.7% 2.2% 4.7% 9.2% 3.4% 5.7%
40 Flex III -1.3% -4.6% -0.8% 5.6% n/a n/a n/a
40 Flex II -1.6% -3.1% 0.6% 6.3% 12.7% 7.7% 9.8%
40 Fidelity -0.8% 0.2% 1.5% 5.1% 9.6% 2.8% 5.1%















*   80 Fidelity is a portfolio of very popular and widely-available index funds from Fidelity Investments allocated in a 80% stocks, 20% bonds strategy similar to that of the 80 Flex portfolios, and I want to compare the two; the 80 Fidelity portfolio uses a style-pure, buy-hold-rebalance method, while the 80 Flex portfolio allows for a great deal of tactical adjustments within the 80% stock long-term strategy.

** Not all Flex III funds were available for the full 10-year period, but all Flex II funds were.

The Stock-Bond-Alternatives-Cash allocation percentages are approximately:

80 Flex III:  43-10-18-29
60 Flex III:  32-20-14-34
40 Flex III:  21-29-11-39

I still believe staying the course with a global/flexible portfolio is a lot better than trying to time the market.  Please contact me with your questions or thoughts.  Thank you!

--Gary

(FYI, my own retirement portfolio remains mostly in 80 Flex III.)

Garo Linck Partoyan
Financial Advisor
Potomac Wealth Strategies, LLC
(703) 746-8195
Garo.Partoyan@PotomacWealthStrategies.com
www.PotomacWealthStrategies.com































































































































Wednesday, November 9, 2011

Flex Portfolio Performance Through October 2011

After a very difficult 3rd quarter, and an especially rough September, for stock markets, they went way up in October.  Since Potomac Wealth Strategies' Flex portfolios are widely diversified, their performance lagged relative to the stock markets.  Given the volatility of the markets, and the problems in the global economy, I am still strongly in favor of using a global/flexible portfolio and think Flex is the way to go.

So, how did Flex perform?  Not as well as I would like, and there are two culprits:  the Arrow DWA Tactical fund has been underperforming, likely because it uses an intermediate-term trend-following methodology that really does well over the long-haul but does not react to the kind of short-term volatility we are experiencing now; and Ivy Asset Strategy (which is much like a hedge fund and is the riskiest fund in the Flex portfolios) has invested fully in growth companies in emerging markets that have had a rough time lately.

What to do?  I am considering reducing the exposure to Arrow DWA Tactical for the Flex III portfolios; Flex II does not use this fund and performed significantly better recently, and about the same over the longer periods.  I am also in touch monthly with the folks at Ivy Funds--Asset Strategy fund has been performing very well lately (up 14.4% just in October, vs. 10.8% for the S&P 500, and up 2.2% vs. 1.9% so far in November), and I am inclined to stick with it because of its track-record and the potential for great returns.

Here are the performance #s:

For October 2011:
S&P 500:   10.8%
80 Fidelity:  8.3%*
80 Flex III:  4.6% 
60 Flex III:  4.2%
40 Flex III:  3.8%

Trailing Three-months (through 10/31):
S&P 500:    -2.5%
80 Fidelity:  -5.2%
80 Flex III:  -6.7%
60 Flex III:  -5.7%
40 Flex III:  -4.6% 

For 2011 YTD (through 10/31):
S&P 500:     1.2%
80 Fidelity:  -1.7%
80 Flex III:  -1.2%
60 Flex III:  0.3%
40 Flex III:  0.5%
For the 2-yr period ending 10/31/11:
SP 500:     12.1% per year
80 Fidelity: 7.3% per year

80 Flex III:  8.5% per year

60 Flex III:  8.1% per year

40 Flex III:  7.7% per year

For the 3-yr period ending 10/31/11**:
SP 500:      11.3% per year
80 Fidelity: 10.4% per year
80 Flex II:  15.2% per year

60 Flex II:  14.2% per year

40 Flex II:  13.19% per year
For the 10-yr period ending 10/31/11**:
SP 500:       3.6% per year
80 Fidelity:  5.3% per year
80 Flex II:  11.5% per year
60 Flex II:  10.8% per year
40 Flex II:  10.1% per year

*   80 Fidelity is a portfolio of very popular and widely-available index funds from Fidelity Investments allocated in a 80% stocks, 20% bonds strategy similar to that of the 80 Flex portfolios, and I want to compare the two; the 80 Fidelity portfolio uses a style-pure, buy-hold-rebalance method, while the 80 Flex portfolio allows for a great deal of tactical adjustments within the 80% stock long-term strategy.

** Not all Flex III funds were available for the full 10-year period, but all Flex II funds were.

The Stock-Bond-Alternatives-Cash allocation percentages are approximately:

80 Flex III:  43-10-18-29
60 Flex III:  32-18-14-36
40 Flex III:  21-26-11-42

I still believe staying the course with a global/flexible portfolio is a lot better than trying to time the market.  Please contact me with your questions or thoughts.  Thank you!

--Gary

(FYI, my own retirement portfolio remains mostly in 80 Flex III.)

Garo Linck Partoyan
Financial Advisor
Potomac Wealth Strategies, LLC
(703) 746-8195
Garo.Partoyan@PotomacWealthStrategies.com
www.PotomacWealthStrategies.com

Monday, October 3, 2011

Flex Portfolio Performance Through September 2011

It was a very difficult quarter, and an especially rough September, for stock markets.  European "sovereign debt" worries (countries potentially going bankrupt) and renewed concerns about the possibility of the USA entering another recession both hurt developed markets, and slowing growth in China put pressure on emerging markets' stock, commodity and currency markets.

How did my clients fare?  Well, that's obviously a personal and private matter for each client, but this blog entry shows performance data for the three most commonly-used portfolios in my practice.

For September 2011:
S&P 500:    -7.0%
80 Fidelity:  -7.0%*
80 Flex III:  -9.1%
60 Flex III:  -8.0%
40 Flex III:  -6.9%

For 2011-q3 (7/1 through 9/30):
S&P 500:    -13.8%
80 Fidelity:  -13.6%
80 Flex III:  -9.4%
60 Flex III:  -8.1%
40 Flex III:  -6.8% 

For 2011 YTD (1/1 through 9/30):
S&P 500:    -8.7%
80 Fidelity:  -9.2%
80 Flex III:  -5.5%
60 Flex III:  -4.3%
40 Flex III:  -3.2% 

For the 10-yr period ending 9/30/11**:
SP 500:       2.7% per year
80 Fidelity:  4.7% per year
80 Flex II:  11.0% per year
60 Flex II:  10.4% per year
40 Flex II:   9.8% per year

*   80 Fidelity is a portfolio of very popular and widely-available index funds from Fidelity Investments allocated in a 80% stocks, 20% bonds strategy similar to that of the 80 Flex portfolios, and I want to compare the two; the 80 Fidelity portfolio uses a style-pure, buy-hold-rebalance method, while the 80 Flex portfolio allows for a great deal of tactical adjustments within the 80% stock long-term strategy.

** Not all Flex III funds were available for the full 10-year period, but all Flex II funds were.

The Stock-Bond-Alternatives-Cash allocation percentages are approximately:

80 Flex III:  47-9-17-27
60 Flex III:  35-17-14-34
40 Flex III:  24-25-10-41

I still believe staying the course with a global/flexible portfolio is, for most investors, probably a lot better than trying to time the market.  Please contact me with your questions or thoughts.  Thank you!

--Gary

(FYI, my own retirement portfolio remains mostly in 80 Flex III.)

Garo Linck Partoyan
Financial Advisor
Potomac Wealth Strategies, LLC
(703) 746-8195
Garo.Partoyan@PotomacWealthStrategies.com
www.PotomacWealthStrategies.com

Saturday, September 3, 2011

Giving Thanks to Those Who've Helped Me Build My Career!

We all learn a lot from others, and it's good to "give props".

Thanks to Soy Chu and Jeff Benjamin for giving me my first career-oriented job at New Year Tech.  I didn't know what I wanted to do or how to do anything in particular then, but they let me grow into some things and taught me a lot.  And Soy, the owner, kept me on even during the hard times.

Thanks to Rich Kotite and Todd Stayin for getting me into the corporate telecom world at Winstar.  That was a great ride and I learned a ton.  Todd got me in the door and took me under his wing when Rich hired me, and Rich made sure I had what I needed to learn the business and make contributions right off the bat.  And there is where I met Joe Thompson.  JT set me straight ("you're good, and we promoted you to Manager, but you gotta find something you love and do that; you like telecom okay and all, but find your passion and do it."), and that was huge.  It prompted me to consider taking a shot at what I always really wanted to do, which leads me to this...

Thanks to Bill Waggoner of Morgan Stanley in Menlo Park for giving me a shot ten years ago.

Thanks to Greg Davis of Morgan Stanley for letting me transfer my business to his MS office in Tysons Corner when I wanted to move back home; thanks, also, to Greg for helping me understand my strengths and weaknesses in various investment areas.

Thanks to Loren Evans of A.G Edwards & Sons (then Wachovia Securities, and now Wells Fargo Advisors) for opening my mind and practice to the idea of tactical adjustments within a long-term strategy (the genesis of my Flex portfolio methodology).

And thanks to Deana Arnett, Certified Financial Planner extraordinaire, for teaching me how to be a real financial advisor, not just an "asset gatherer" (can't help anyone if you don't "sell" and bring in the business, but then ya gotta make sure you're really helping people).

I have a few young go-getters who have thanked me recently for helping them get going in their careers, and that prompted me to reflect on those who've helped me.  Pay it forward, and don't forget to pay it back!

Friday, September 2, 2011

Flex Portfolio Performance Through August 2011

It has been a volatile time for the stock markets.  This is a quick blog entry to share the performance data for the three most commonly-used portfolios in my practice.

For August 2011:
S&P 500:     -5.4%
80 Fidelity:  -5.8%*
80 Flex III:  -2.0%
60 Flex III:  -1.7%
40 Flex III:  -1.4%

For 2011q3 (7/1 through 8/31):
S&P 500:     -7.4%
80 Fidelity:  -7.1%
80 Flex III:  -0.4%
60 Flex III:  -0.2%
40 Flex III:  -0.0%

For the 10-yr period ending 8/31/11**:
S&P 500:     2.6% per year
80 Fidelity:  4.7% per year
80 Flex II:  11.5% per year
60 Flex II:  10.9% per year
40 Flex II:  10.3% per year

*   80 Fidelity is a portfolio of very popular and widely-available index funds from Fidelity Investments allocated in a 80% stocks, 20% bonds strategy similar to that of the 80 Flex portfolios, and I want to compare the two; the 80 Fidelity portfolio uses a style-pure, buy-hold-rebalance method, while the 80 Flex portfolio allows for a great deal of tactical adjustments within the 80% stock long-term strategy.

** Not all Flex III funds were available for the full 10-year period, but all Flex II funds were.

An important aspect of my Flex portfolios is their ability to tactically shift allocation within the long-term strategy; why stay put if you are pretty sure it's going to be rough and you have a better idea at the moment?  Right now, the Stock-Bond-Alternatives-Cash allocation percentages are approximately:

80 Flex III:  48-9-17-26
60 Flex III:  36-17-14-33
40 Flex III:  24-24-12-40

For long-term investors, staying the course with a global/flexible portfolio is probably a lot better than trying to time the market.  Please contact me with your questions or thoughts.  Thank you!

--Gary

(FYI, my own retirement portfolio is mostly in 80 Flex III—I have a pretty strong risk tolerance and plan to be working and saving for the next 25 years.)

Garo Linck Partoyan
Financial Advisor
Potomac Wealth Strategies, LLC
(703) 746-8195
Garo.Partoyan@PotomacWealthStrategies.com
www.PotomacWealthStrategies.com

Tuesday, August 9, 2011

message to clients 8/9/11

Good morning.  As you probably know, yesterday the S&P 500 index was down -6.7%.  The Flex portfolios I use for most of my clients fared better.  For example:

80 Flex III:  -2.9%
60 Flex III:  -2.4%
40 Flex III:  -1.9%

Meanwhile, for the Quarter-to-Date (7/1 – 8/8), the S&P 500 is down –15.1%, and the Flex portfolios have again fared better:

80 Flex III:  -5.9%
60 Flex III:  -4.6%
40 Flex III:  -3.2%

Some clients have asked about going to cash or seeking shelter, and the Flex portfolios have already been doing quite a bit of that for us, as I reminded everyone in some recent messages.  Right now, the Stock-Bond-Alternatives-Cash allocation percentages are approximately:

80 Flex III:  50-10-15-25
60 Flex III:  35-15-15-35
40 Flex III:  25-25-10-40

(So, even the portfolio that normally aims to be 80% in stocks is only about 50% in stocks now, and the Flex portfolios are holding ~25% or more in net cash.  Each mutual fund in the Flex portfolios has its own range of investment discretion, so the cash on-hand in those funds is ready to be invested whenever their managers see fit.  When a market declines broadly like this, many stocks become significantly undervalued, so having cash on-hand for opportunistic investing is one of the great advantages delivered by the funds in our Flex portfolios.)

Anyway, the Flex portfolios are demonstrating superior performance compared to the stock market.  They did so also in the market's terrible 2008 through early-2009 period.  They also recovered impressively after that.  And the 3-, 5- and 10-year track records of the Flex portfolios are double or even triple the annualize performance of the stock market.

Thus for long-term investors, it is sensible to stay the course with a global/flexible portfolio instead of trying to time the market.  Having said that as your investment advisor, I recognize it is your decision if you wish to make any changes.  If you do, let’s discuss it and go forward.

In any case, please contact me with your questions or thoughts.  Thank you!

--Gary

(FYI, my own retirement portfolio is in 80 Flex III—I have a pretty strong risk tolerance and plan to be working and saving for the next 25 years.)

Garo Linck Partoyan
Financial Advisor
Potomac Wealth Strategies, LLC
(703) 746-8195
Garo.Partoyan@PotomacWealthStrategies.com
www.PotomacWealthStrategies.com

message to clients on 7/30/11

Good morning and happy Saturday.  Investors just had a rough week, but our Flex portfolios held-up much better than the stock market.

Here is a quick update on how the most popular of my Flex portfolios have performed in the past year compared to the S&P500.

Time (as of 7/29)              80 Flex III             60 Flex III             40 Flex III             S&P500
1-day                                     -.07                        -.02                        .04                          -.64
1-week                                 -1.45                      -1.01                      -.56                        -3.91
MTD                                      1.55                        1.46                        1.38                        -2.03
YTD                                        5.95                        5.68                        5.40                        3.87
1-year                                   19.37                     16.56                     13.80                     19.47

NOTES:  Data comes from Morningstar; I usually prefer to ignore short-term performance in favor of 3-, 5- and 10-yr track records (where the Flex portfolios have massively outperformed their benchmarks), but I want to keep you as up-to-date as possible.

Thank you, and make it a great weekend!

--Gary
              

Garo Linck Partoyan
Financial Advisor & Owner

Potomac Wealth Strategies, LLC
1800 Diagonal Rd., Suite 600
PMB 12
Alexandria, Virginia  22314
(703) 746-8195
(703) 347-9483 fax
Garo.Partoyan@PotomacWealthStrategies.com
www.PotomacWealthStrategies.com
FINANCIAL BLOG:  http://potomacwealthstrategies.blogspot.com

message to clients on 8/5/11

Good morning.  The US stock markets fell more than 4% yesterday and have now reached the point of "correction", which is 10% down from recent highs.  A "bear market" is 20% down from recent highs.

Since 1962, there have been 25 corrections and nine of them have turned into bear markets.  That's not much different than a coin flip for those who are wondering if we should ride this out or seek shelter.

So, I am providing two items for you to read and consider.  One is attached, and the other is linked here:  http://latimesblogs.latimes.com/money_co/2011/08/stock-market-correction-bear-market-wall-street-birinyi.html

The linked article offers some perspective on market history, while the attached guest-blog by PIMCO's Mohamed El-Erian offers probably the best overview I've seen on the conditions that are fueling this market volatility.

MY ADVICE:  if you think the USA will go back into recession and a bear market will come with it, we should exit or put protections on our equity (stocks) positions; if you think this correction has more to do with the market being overbought, perhaps artificially-inflated by "quantitative easing" programs from the government, then it is okay to keep the equities allocation.

NOTE:  thanks to the nature of the Flex portfolios, most of my clients are holding much more net cash than would be normal; while we are "fully invested", the funds we're using are not, so the professional portfolio managers working for us have more "dry powder" than usual, either for safety if things keep going badly or for opportunities if the correction ends and markets stabilize or move up again.

As always, please let me know if you have any questions.  If you want to make a portfolio move, please call me or e-mail me.  If you do not hear from me within a few minutes, please don't hesitate to call Schwab's Signature Services Alliance team at (800) 515-2157.

Thank you.

--Gary


Garo Linck Partoyan
Financial Advisor
Potomac Wealth Strategies, LLC
(703) 746-8195
Garo.Partoyan@PotomacWealthStrategies.com
www.PotomacWealthStrategies.com

Wednesday, June 22, 2011

Bill Gross' Lets It All Hang Out--Radical Change of Approach Needed for USA

If you can get over the initial intellectual/emotional hurdle presented by this article--that college is, for many if not most, as it is currently working, not exactly part of the solution to our economic woes--you'll find a lot to chew on here.

Bill Gross is arguably the greatest money manager in modern history (he's "the bond king" and "the Warren Buffett of bonds"--and his PIMCO Total Return fund is the largest mutual fund on the planet and owns a tremendous market-beating track-record), and he has a global perspective that is almost uniquely astute and often pretty unconventional.  And he calls it like he sees it, whatever "it" is...

In short, he sees no way for private-sector market-based idealism--OR government-as-usual--to dig us out of this hole any time soon.  Time to think radically, perhaps.

We have created less than two-million jobs while the workforce has expanded by 15 million people in the past decade.  And while he doesn't say it here, there's a strong argument to be made that the 20mm+ jobs created in the previous decade were largely thanks to a largely false (over-leveraged, service-based instead of asset/manufacturing-based) economy...  think of the causes of the economic disaster that started in late-2007 and persists today.

Balancing the budget and re-jiggering the cost-curve of entitlements and healthcare programs are of course necessary, Gross says or implies, but will not be enough to close this employment gap, and neither will the education provided by Today's version of undergraduate college education.

Call to action, or crazy billionaire screaming?  Either way, I'm listening.

Wednesday, April 13, 2011

Tax Rate Cuts vs. Share of Tax Burden

Prior to Bush's income tax cuts, the top 20% paid 78% of the income taxes and the bottom 40% paid 2.8%.
After the cuts, it was 81% and 2.2%.
That is probably news to a lot of folks, and it goes along with what I calculated about whether or not tax cuts pay for themselves (see here for more info).

Monday, April 4, 2011

What Is "Rich"?

I just read a brief blog about Fidelity Investments' fourth annual Millionaires Survey.  In short, most millionaires don't "feel" like they are "rich".  That probably makes most non-millionaires a little resentful, and it inspires me to offer a walk-through of my way of analyzing this whole "rich" or "not rich" point of view.

Cut to the chase:  Think of "rich" as a function of wealth.  Think of wealth as "access to goods and services, necessary and merely desirable".  The higher your income, the richer you are.

If you're earning your income, your assets are not really the issue--you don't buy gas and food and pay the mortgage with stock certificates.  If you're not earning income and, instead, living off of your assets, then your assets are the area of focus when we're talking about who is rich.

Now, what's the cut-off between "rich" and "not rich"?  No one can say for sure, but let's say anyone in the top 20% of income.  Fair enough?

In one survey, I read that $92k per year puts a household in the top 20% income grouping.  If that's so, then I'd say family earning $92k or more is "rich".  Maybe not in Northern Virginia or Manhattan, but most certainly in Toledo or Amarillo.  Regional cost of living adjustments are a topic for another time...

Now, if a family is not working (retired, already rich, whatever), how much do they need in the bank to be "rich"?  Most financial planners use a withdrawal rate of 4% of nest egg for income (if and when short-term interest rates rise up from 0-1%, where they are now, that 4% will increase a few points).  That would mean it takes about $2,300,000 "in the bank" in order to be rich.  At least right now in this low-rate environment.

That's not including equity in one's home or income-earning assets.  But if someone has a rental property that delivers net income of $10k per year, then we'd only need $2,050,000 "in the bank" to produce the other $82k of income.

So, by this logic, it's a dynamic assessment.  What does "rich" mean?  Where is the line between rich and not rich?  What assumptions can we make about income-producing investments vis a vis prevailing interest rates?

Bottom line, you're probably "rich" if you have the ability, financially, to do all the necessary things in life with more ease and certainty than most other folks.  If you're earning a living, a high income can make you rich.  If you already have a relatively high net worth, you might be rich, as long as your real and investible assets produce enough income.

Tuesday, January 25, 2011

Insurance, Just In Case

I just learned that a friend's colleague, a young and healthy man, had a stroke today.  His wife is pregnant and they have a one year-old child also.  Prayers for them, and motivation for us.

Do you have enough of the right kind of Disability insurance and Life insurance?  Anything can happen, and if we have others depending on us for income, we can insure something is there if we die or if we are suddenly unable to earn a living.

My firm does not sell insurance, yet it is higher on my list of recommendations than saving and investing (things on which I earn my living).  Think about that, please, and then consider you own situation.

Thank you.

Tuesday, January 11, 2011

2011 Predictions: Three Different Scenarios

Here are three scenarios for 2011:

Worst...
  • HOUSING DOUBLE-DIP of -20%, thanks to spike in foreclosures that were artificially on-hold 2010.
  • BOND MARKETS TANK in the US and EuroZone, as over-indebted G20 countries struggle to sell bonds to pay for deficit spending and thus raise rates to attract buyers even though the economies are not strong enough yet to handle higher costs of capital.
  • WAR IN KOREA, as S. Korea and USA become fed-up with N. Korea's aggressive antics.
  • WAR IN IRAN, as Israel and USA strike preemptively at Iran's nuke facilities, fearing Iran getting "the bomb".
  • CYBER-WAR BY CHINA disables critical systems of USA military and exposes its vulnerability.
Best...
  • USA ECONOMY RECOVERS FASTER than expected, fueled by continued low interest rates thanks to relative strength compared to other developed-economy countries and by the accelerated roll-out of alternative fuels that reduce geopolitical heat and spur economic growth and hiring; taking advantage of this situation, the government embarks on massive infrastructure-rebuilding programs that create jobs and increase demand.
  • USA STOCK MARKET BOOMS, going up 20+%, thanks to good economic/employment data and fueled by record amounts of cash in both corporate and personal coffers.
  • IRAQ BECOMES MORE STABLE and the USA really does exit as planned.
  • AFGHANISTAN IS BROUGHT UNDER CONTROL thanks to history-making counterinsurgency tactics, mastered in Iraq and modified for Afghanistan, are executed prudently and pecisely; Gen. Petraeus' status as a great leader is solidified.
  • WEALTH GAP IN USA CLOSES while regulations and taxes remain limited; evidence provided for posterity that Keynesian pump-priming successfully, but temporarily, served the purpose of stopping the economic free-fall and re-igniting growth before more normal market forces take-over.
Likely...
  • WEAK ECONOMIC RECOVER IN USA, but no double-dip recession or second housing-price collapse.
  • COMMODITIES, DOLLAR, AND STOCKS all rise, signaling brighter future.
  • UNEMPLOYMENT GOES TO 10% as new jobs are not being created fast enough.
  • GOP CONGRESS OVERSHOOTS by trying to roll-back most of president Obama's agenda, costing some public opinion points for the Republicans.
  • IRAQ INCREASES STABILITY and nurtures its new government, but US troops remain there and are still targeted for attacks by insurgents.
  • AFGHANISTAN FLARES-UP as USA tries to maintain a non-kinetic posture and then overreacts to insurgents' attacks in ways that cost unnecessary civilian lives; "Obama's War" starts to look more like an actual war.
  • CHINA ALLOWS ITS CURRENCY TO FLOAT as modernists want to be real global player and not be perceived as a manipulative economic bully.
RECOMMENDATIONS FOR YOUR PORTFOLIOS:
  • Avoid long-dated bonds of developed-economy governments.
  • Own high-quality stocks around the globe.
  • Use global/flexible mutual funds and/or portfolio managers for most or all of your investments.
  • Keep 5-15% in cash, in addition to whatever the global/flexible fund managers are doing--dry powder, so to speak, in case of emergency and/or opportunity.

GENERAL FINANCIAL RECOMMENDATIONS:
  • Life insurance for your dependents
  • Disability insurance for yourself and dependents
  • Cash for rainy days
  • Retirement savings next, before education and other savings (there's no work-study or SallieMae for retirement)
  • Refinance your home and investment properties to lower rates, but don't extend your time-frame too much (if you have 18 years left on a mortgage at 7%, be careful about re-fi to 4.875% if you're then going to be right back at 30 years to go...)
  • Give generously if you have extra, accept help gratefully if you need it.

Friday, January 7, 2011

What We Expect for 2011

I expect continued market volatility, for economic and political reasons.  This week's debt ceiling stuff is just part of the big picture that I think is already driving the ship.

Developed-market countries are laden with debt and suffering from declining, or no-better-than-anemic economies.  At some point, some major currencies could really devalue and the bond prices of the world's traditionally "best" economies could tank when the interest rates spike in the auction markets as they issue unprecedented amounts of new debt (via government-bond auctions) to fund their ongoing deficit spending.   The USA is not inherently exempt from this just because we're the greatest economic power in history.  Just ask the Romans and British about the notion of indefinite staying-power.

My best ideas for this year:
  • opportunistic stock-picking (let's look at that--I like C, VCM, RIG, F, GM and some techies right now--seems they are under-valued and could skyrocket)
  • opportunistic commodity bets (gold should go up, oil should go up, copper goes up especially if the USA recovers better than expected)
  • global/emerging markets bond picking (as the Asian and other developing markets grow stronger, they can pay lower bond interest rates, boosting bond prices; and countries with rising rates, while posing risk to asset values, at least offer better income payments)
  • dividend-paying stocks of high-quality, global companies are a great choice for income-oriented investors since quality bonds and cash alternatives are paying so little now
The big risk I fear, since all this macroeconomic knowledge is kinda baked into the cake, is China's efforts to slow down a bit to avoid the bad kind of inflation--if they over-do it and tank their economy, then it could lead to another global economic train-wreck and US bonds and dollar could go up suddenly.  This is unlikely, but staying nimble and diversified is nonetheless advisable.

 I still like my "Flex" portfolios for these reasons.  It is confidence-inspiring to have Dorsey Wright's Systematic Relative Strength strategy, Mssrs. Avery and Caldwell, and Mr. Cuggino running the opportunistic/unconventional stuff through their mutual funds, and all the more reason to have the Yacktmans and the Eveillard disciples picking our stocks, and Mssrs. Gross and Hasenstab picking our bonds.