The art of crisis management with a conservative portfolio
We can’t predict events like those in North Africa and Japan, says this editor, but we can prepare for them with high-yielding investments.
Well at least one crisis has been averted.
The U.S. government will not be shutting down, although peace has not exactly broken out in Congress, either.
What’s more, the stimulus programs that have charged up the U.S. economy and the markets now have a limited shelf life.
The fact is, we live in a world of crisis, says one conservative American editor. Many events with no direct connection to the economy or the markets have a heavy influence on both.
“This is why we keep our portfolios balanced and hedged and don’t bet the entire portfolio on one economic or market outcome,” we read in Bob Carlson’s Retirement Watch.
Instability in the Middle East and North Africa is stirring up the oil market. The earthquake and tsunami in Japan raise uncertainties about costs and insurance and disrupt international trade.
“We can’t forecast events such as these,” writes Mr. Carlson. “What we can do is realize they’ll happen from time to time and without notice. We prepare for their effects with our diversification and ultimately the sell signals.”
But these preparations are necessary even without international shock waves. “Even before these events, the economy provided ample reason for diversification and caution.”
As we normally do, we will begin by looking at the specific measures this editor takes in his Retirement Paycheck Portfolio.
Gold as a profit center
Whether or not the American funds in this retirement portfolio find their way into many Canadian portfolios, they offer an instructive look at how this editor seeks to preserve capital and manage risk.
This portfolio, he notes, continues to deliver “above-average yields and capital gains.” In the latest issue, he focuses on three successful funds, and puts a sell signal on a fourth investment.
iShares COMEX Gold Trust (AMEX-IAU) “is both an inflation hedge and an alternate currency in case the dollar loses its value.” And gold “has turned into quite a profit center for the portfolio.”
Yet he keeps his sell signal active so that he doesn’t give up the gains in a correction. “Gold is a thin market partly influenced by part-time investors, so it could change direction in a hurry.”
It is a sell below $12.80, he advises. It trades today at $14.36, which is just below the 52-week high it reached on Friday.
“You don’t have to invest in bonds and other income investments to earn a high yield,” insists Mr. Carlson. Exhibit A is Cohen & Steers Closed-End Opportunity (NYSE-FOF), a closed-end fund that invests in other closed-end funds. It has over 100 holdings, in both equity funds — some of which write options — and high-yield bond funds.
It has returned over 4 per cent this year and yields 7.5 per cent. It trades at $13.56.
Another hedge against a falling dollar and inflation (“the perpetual killers of income portfolios”) is Gabelli Global Gold, Natural Resources and Income Trust (AMEX-GGN). This closed-end fund owns stocks of gold miners and other resource firms. Remember, the editor tells his readers, there is a gap between the price of gold and the shares of mining companies themselves. Pay attention to the sell signal, he urges.
Yielding a rich 8.7 per cent, this fund trades at $19.31, well above its sell signal of $17.40.
The editor has been riding the energy boom with Master Limited Partnerships like Tortoise Energy (NYSE-TYY). But now he thinks it’s time to clean them out of his portfolios. Tortoise is fully valued or overvalued at $28.06 and its yield has slipped below 6 per cent. “Let’s beat the stampede out of this sector and take our profits.”
Not a sure thing
The U.S. economy regained its footing in 2010 and its growth has continued into 2011, writes the editor. Even the beleaguered service industry got moving.
Unemployment is gradually improving and capital investment is making “slow, modest improvement,” he adds.
“The great unknown is the extent to which the renewed economic activity is sustainable,” states Mr. Carlson. “The Federal Reserve’s QE 2 [Quantitative Easing 2—Ed.] policy clearly is the major reason for rising stock and commodity prices, more optimism and much of the economic growth.” It is scheduled to end in June.
Private credit growth is “positive but still very low.” So as the effects of stimulus policies begin to fade in the second half of the year, we’ll have to see what happens, he says. The economy and the markets could hit the wall, or we could discover that they are on “a sustainable growth path.”
On the other hand, if the economy stumbles, we could get QE 3.
In either case, there is reason to fear inflation, says Mr. Carlson. It is still contained in developed nations, but not as much as before. And emerging nations like China are having difficulty keeping it under wraps. The editor expects it to be a greater concern by 2012.
Higher oil prices could take their toll as well, cutting down consumer spending and modestly decreasing economic growth.
On the whole, this cautious editor is reasonably optimistic. “I expect current trends to stay in place through 2011, but it’s not a sure thing. That’s why we remain balanced and diversified.”
|
E-mail this article
Printer-Friendly
