This Week’s Money Question: A Peek Inside My Portfolio

That was a fun read. I have a few questions re: “…in the event the market looks to be headed down for a long period of time”.

1. How will you go about identifying that condition when or as (but not after) it occurs?

2. “long period of time” is subjective; what is your definition of it? (I overheard someone recently who was asked this question. They answered 4-6 yrs, and I was a bit surprised. At the very least, long term means 10 yrs to me, and more often it means something like 30 yrs.)

3. And instead of “heading down”, what happens if you decide the market looks to be headed nowhere (either up or down more than a few pts each yr) for that same long period of time? Would you adjust your portfolio?

Well to answer your questions, as far as number 1 goes, it is almost impossible to be able to entirely predict a a downturn, let alone how long it will last. But I look at it in terms of quarters. If the overall equities market is down 3 consecutive quarters that would make me consider allocating the bonds/cash position into more safe or stable investments for some downside protection.

2. Well that term is subjective and depending on what you are talking about it can mean different things. Yes, if you are talking about an investment horizon, I say 10 years or more is “long”. But if you are talking about market trends that period shortens quite a bit. For example if the stock market was negative for 3 consecutive years, I would consider that a long period of time in regards to the trend of the market. So when I said long period of time, I simply meant the direction of the market.

3. This is where asset allocation comes in. Regardless of what the market was doing I wouldn’t deviate from my target allocation of between a 60/40 or 70/30 mix. If you try to move heavy into equities to chase a bull market or move to bonds when you think the markets will go down you are setting yourself up for failure since you are trying to time the market.

So if I expected the market to go down and it doesn’t like you suggest, I don’t have much to worry about since I still have plenty in equities taking advantage of the up market. Even if it goes sideways, not a big deal since I still have plenty of income-generating investments as well.

Okay, I see that now. Your only portfolio adjustment would be in bond credit quality if you saw 3 consecutive down quarters in the equities market(s). I wasn’t looking for advice, just like to compare / contrast others’ approaches with my own. Thanks for the clarification.

First of all for the downturn question, I agree that timing the market is difficult/impossible, but there are some general things to look out for. The two most important indicators are inflation and the Fed interest rates. The Fed reduces inflation by raising interest rates, but sometimes this slows down the economy so much that we have a recession (this caused the timing of the tech bubble crash in 2000). Basically if the economy is shaky (not much inflation) but the Fed is still raising the rates, you have a good chance of seeing the market go down.

For international etfs, I like international small cap (DLS/GWX) and Pacific ex-Japan (DND). Intl. small cap gives you the growth of emerging markets without as much political risk. DND is a mix of Australia, Singapore, and Hong Kong. HK may be overvalued short term, but is still a good long term play. Australia is a good bet because it is seeing a lot more trade due to the growth of China. Australia also gives you good exposure to the commodities markets, because Australia is a huge raw materials exporter.