I would call myself an investor who is comfortable with risk, but over the years as I have amassed more capital I have shifted to preserving what I have as much as growing it. The other issue is that I have always ignored Wall Street research, simply because much of it is momentum-based: if the stock goes up, then it’s a good stock, and if it goes down then it’s a bad one.Of course, almost no one can tell the direction of a stock before-the-fact (unless you’re cheating). You can be a lucky investor, but I want to be an intelligent one. Moreover, not enough attention is paid to the business of a company and the trustworthiness of its management. You want a company relentlessly focused on building shareholder value, cutting costs and overhead, deploying capital for the benefit of shareholders, not for fat-cat CEOs. All in a marvelous business where the profit margins are high. So the ethos of Wall Street, which seems to be “fleece the individual investor and even the taxpayer, if you can get away with it,” is what you want to avoid.
First, I re-balance my portfolios. That is, if I want 40 percent in bonds, and 60 percent in stocks, if those are my targets, I check at the beginning of the year and move money to regain those targets. What you are doing is moving money from your successes (say stocks, which climbed to 65 percent of your portfolio) to your failures (say bonds, which declined in relative value to your stocks, to 35 percent of your portfolio). It’s systematic contrarian investing. I recently read an article in the New York Times that showed how steadily saving for and re-balancing a diversified portfolio every year would have turned this past decade into an investing success, rather than the dismal failure it was for those who did nothing.
Second, I have been increasing my exposure to international stocks over the years, particularly emerging markets. It’s simple. The United States is a mature economy, with a dysfunctional political system which shows no sign of tackling our major problems. The American share of worldwide stock-market wealth has relentlessly declined: in 1970, the U.S. stock market was 66 percent of world market capitalizations, in 2007 our share was 42 percent, in 2008, 29.9 percent. It’s no secret that China, Brazil, India, South Korea, and so on are growing faster than we are.
So I invest in foreign-stock mutual funds, particularly index funds covering everything from developed economies to emerging markets. Also, I make sure the mutual funds I own do not hedge the dollar. Why? I want the currency risk, for better or for worse. That’s part of the diversification of international investing, and it’s also a bet against the dollar and our trade and budget deficits. Our politicians will blame each other and vie for short-term power, until one day they will discover the mathematical oppression of our spending-beyond-our-means on unnecessary wars and gargantuan entitlements will have weakened us to a regional power, if that.
Third, I have diversified my portfolio to include things like raw land in Texas, where the demographics are excellent, and TIPS, or Treasury inflation-protected securities. Although there is scant inflation now, and TIPS seem overbought because of the worries about the deficit, I believe you need a smattering of unconventional assets that will help you fight inflation when it rears its ugly head again, especially after we have printed truckloads of dollars. There could also be a scenario in which interest rates are high, because of our weakened dollar and jittery creditors, and the American economy stagnant, our stand-of-living in a deleveraging decline. Unconventional assets mean uncorrelated assets, and will mean less panic for you in whatever scary environment you find yourself in.
Over the past two years, I do feel something fundamental has changed. The politicians in Washington have stopped working together; our democracy seems more ambush-demagogy than the voices of the people; the way we talk to each other, through TV and radio, in ten-second sound bytes, prevents us from understanding each other. I just want my family to survive.
