20% Cash

Lehman Brothers changed its model portfolio to raise more cash. The new allocation they recommend to clients is 65% equities, 15% bonds and 20% cash. This move represents reducing equity exposure by 5% and bond exposure by 2.5%. The firm is suggesting this based on what they perceive as immediate Katrina aftermath.

The firm still sees the S+P 500 going to 1300 by year end so they may allocate more to equities very quickly.

I don't know whether this call will be right or wrong but this illustrates what I was writing about a few weeks ago. A couple of readers left comments detailing, what I felt were too extreme, defensive action they had taken in their portfolios. All stocks had been sold, as I recall, and there was consideration for shorting the market one way or another. I wrote a couple of times that I thought, and still think, 100% cash with long term money is very aggressive.

The call from Lehman is a tweak. If the market sky rockets from here the Lehman call won't hurt clients. It might cause a lag which is OK, actively managed portfolios will lag occasionally. If the Lehman call is right but then things deteriorate they can reduce equity exposure a little more. Most of this year has been in the realm of down a little/up a little. Low volatility is a time for the occasional tweak not huge changes.

At some point the environment will change in a substantial way but for now there is not much reason to turn a portfolio upside down.