How to run a safe investment portfolio
This is no time for investors to run hard after one big score, says this U.S. analyst, who shows how to go after safe, sustainable profits.
It’s a marathon, not a sprint. But be careful how you run it.
The long, tortuous course the financial crisis has run sometimes feels like the Boston, New York and Toronto marathons all strung together.
But marathons can be misleading, we hear from one U.S. observer who invariably takes a cautious approach to the markets. Mr. Bob Carlson cites a recent article in the Wall Street Journal noting the fact that “many amateur marathoners don’t retain long-term health benefits.”
They train intensively for perhaps a decade or more, but cannot sustain that high level of activity indefinitely, we read in Bob Carlson’s Retirement Watch.
“Intense and extreme health routines don’t work for the long term because few people can keep up that pace.” In time, most become regular sedentary citizens.
“What produces good health for the long term is regular exercise at a comfortable, sustainable level,” says Mr. Carlson. Take the same approach with your investments, he says.
Don’t look for the big score. Don’t strain yourself looking for market tops and bottoms. Many investors, he says, “read about hedge fund manager John Paulson’s multi-billion dollar gains from betting on falling home prices (as described in The Greatest Trade Ever by Gregory Zuckerman) and want to imitate it.”
Don’t even think about it, this editor says. We’ll see just how he goes about making his investments safe and sustainable.
Tough to be right
“We don’t rely on one economic scenario,” says Mr. Carlson. “We own portfolios of diversified investments, and portfolios that will earn solid returns under different economic scenarios.”
Investors should remove the highest risks, he says, and stick with lower-risk opportunities. “Most investors bet on one outcome or the other. That’s fine when you’re right, but it’s tough to be right often enough to make the wild ride worthwhile.”
Mr. Carlson has had no individual stocks in his portfolios for more than a year. His investments are in many different U.S. funds, the names of which will not be of great interest to Canadian investors.
But the nature of those investments tells us just how this prudent investor holds his course in uncertain markets.
Income Growth Portfolio
Let’s take Mr. Carlson’s Income Growth Portfolio as an example. (He has different weightings based on whether it’s treated as a simple core portfolio or an actively managed one or half-and-half; we’ll take the half-and-half figures.)
Close to 40 per cent of this portfolio is taken up with an Inflation-Protected Securities Fund made up largely of U.S. government bonds.
12 per cent is invested in a fund that tracks Short-Term Federal Bonds. 10 per cent is in a Total Return Bond Fund that holds bonds and mortgages and another 10 per cent is in an International Bond Fund.
Then there’s 10 per cent in a Strategic Growth Hedge Fund. This is a real hedge fund that is “fully hedged against a stock market decline,” the editor informs us. It isn’t one of those private equity funds that borrowed the name to launch expensive, high-risk (and often disastrous) adventures.
Single-digit portions are spread among an International Inflation-Protected Bond Fund, a Total Return Hedge Fund, an American Gas Index Fund, an American Utilities Fund, an iShares Gold Trust and a Realty Shares Fund (which he advises those with a managed portfolio to sell now).
This is just one of a number of portfolios in this advisory — there are others labelled Sector, Balanced and Income, as well as a group of more aggressive portfolios containing a variety of funds devoted to emerging markets, small caps, gold and so forth.
But you get the big picture. Balance ... and capital preservation.
Not watching our capital decline
“We went to our capital preservation portfolios a year ago and have had nice growth with them,” says Mr. Carlson.
These investments do well when other investments do poorly, he points out.
“We have not been riding the surge in risk assets, such as stocks, high-yield bonds and commodities. But we also missed watching our capital decline sharply in January and February.”
The rise of the stock market from March through June was no surprise, he adds. We had similar bounces several times during the bear market. But the gains in July, August and September were another matter.
“Those gains seemed to be fueled by momentum investors trying to capture the rally, the liquidity from the Federal Reserve making its way into the markets, and the federal government’s stimulus spending.”
But even eight months after the market hit bottom and bounced back, the economy is still weak. This editor sounds a familiar theme: “Normal levels of credit creation and economic growth won’t be restored until the balance sheets of consumers are cleaned up through de-leveraging.”
Until income and debt levels in the U.S. return to their peak levels, neither will asset prices, the editor concludes. And that will take several years at least. When stimulus programs taper off next year, so will the economy.
So keep on running the investment race, this editor advises, but don’t dash off looking for one big score. Make sure you’ve still got money to spare when the credit crisis reaches the finish line.
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