I always say that I don't expect truly bad things to happen. I think a bear market is here but I am expecting a normal bear market that the we have easily survived many times before.
What if the everyone-in-the-shelter crowd turns out to be right? A reader left a link to an article about someone with a very good track record who says a US apocalypse is already here.
Regardless of the fate of the of the US capital markets you still need the X-percent called for in your financial plan. If the US somehow stops growing it is a safe bet that, after the global shock wears off, other countries and asset classes will do just fine (think long term).
Here are some asset classes to think about.
Infrastructure
I am not talking about the road builders that Cramer favors I mean things like publicly traded toll roads (there are a few around the world), parking garages (if there are any that are public), airports (there are some publicly traded airports in foreign markets), some of the Macquarie funds (I have disclosed many times owning MIC going back two years), power grid listings, maybe even publicly traded exchanges (do you think a publicly traded exchange counts as infrastructure?), shipping ports (if there are any), and there are probably a couple of other ideas in the space. I would also ask if you think the plane leasing companies or shipping stocks count in this space.
These tend to have a low correlation to the US market and kick off some yield.
Absolute Return
In the past I have written about certain OEFs that deliver absolute returns, I perceive the carry trade ETF (which I own) to be an absolute strategy. I would expect there to be more products to come. Additionally I have written about (mostly for RealMoney) pairing sector ETFs with inverse sector ETFs (obviously the indexes mimicked by each ETF would need to be different) but of course this would require trades to rebalance.
Usually absolute lives in its own world and while the returns can be high I think high single digits is a better expectation
Currency
If US markets have a permanent breakdown the dollar will get weaker. As a matter of necessity US based investors would need some protection for the cash portion of the stocks/bonds/cash mix. I have been writing about this and some of what I do to monitor the currency markets, and really learning more about this just makes sense even given the more realistic probability that US will not spiral down.
I believe in currency exposure to different types of countries. Betting only on the "strong" currencies is, just that, a bet. At different times different types of currencies lead. You can either bet which ones will lead or maintain a diversified portfolio.
Commodities
I have never been a 20% commodity guy. Commodities are volatile. Volatility is not bad but adding too much will be a problem at some point. Here again diversification matters. I would want some gold, some ag/soft, some industrial metal exposure and maybe some uranium. These markets are not quite as simple as Jimmy Rogers makes them out to be but the basics can be learned.
Individual Countries (not EFA)
Regardless of what ever happens I will never be a fan of a broad-based product like EFA. If this crazy scenario ever plays out, as mentioned above, you still need your X percent and to get it you will probably need to do more work than you do now.
I written about various countries I favor now with the understanding that the list will need to change over time. Pursuing this type of investing will require ongoing study. This may require the most work of any of these themes.
Foreign Fixed Income
The ETFs BWX (which I own for a few clients) and PCY are a start, but PCY owns dollar denominated paper, and there will be more. I would think that if things in our capital markets really deteriorate it would become easier to buy individual issues from other countries--it now needs a minimum of $100,000 to place an order.
This is kind of page from Nassim Nicholas Taleb's playbook.
Stuff
Maybe this part falls under commodities but getting water and food to places that don't have enough seems like it would be a huge opportunity regardless of what happens in the US. All of the countries that are hot emerging or frontier markets are going to continue to modernize. The respective stock markets will go through normal cycles but the infrastructure building out for water, food and anything else that improves life of an ascending economy will continue for quite a while.
Well that's a good start for now. Maybe this whips up some discussion.
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33 comments:
Good morning.
Could you define what an absolute return fund is, what it would likely be invested in, etc.
Thank you
i would say a long stort strategy is one example but I don't think I would be a big fan of 130/30
Allocation? Allocation? Allocation?
As a daily reader, I have been following some of your thoughts on currencies, commodities, etc and learning at the same time. I now know what I want to add in my portfolio but the real question becomes: by adding more movings parts, how to find the right allocation for each?
Vincent
giving specific numbers potentially becomes a compliance problem.
There are seven segments mentioned in this post. Even modest amounts in all seven would take up a big chunk of the portfolio and not leave much room for domestic equities, but then again in this scenario you wouldn't want that much.
If you then figure four or five other countries with modest weights might be close to the whole portfolio.
Roger, what do you think of the global water ETF, CGW, in relation to PHO? I have owned PHO for a long time, and as far as I can tell through eyeballing the charts, I am not missing out on anything by not being in CGW instead of or in addition to PHO.
Nueoff
as i recall the claymore product is more utilities. PHO and PIO are more industrial.
PHO has been the best, last I looked.
I would like to think that the INTL would lead at somepoint but it has not. I have owned PHO from the beginning. If anything I might want to change to a stock but nothing new for me for now.
Individual Countries (not EFA)
How about VEU? Includes 20% emerging markets, diversified and less risk than a country fund.
clearly the em exposure helped it a lot versus EFA but as a matter of philosophy i think the attributes of the various component countries get blended away or at the very least very diluted.
I am not a crank. I am asking you to look above at this:
Posted by Anonymous Roger is a Moron | 8:48 AM
Now, that looks like it was posted by a crank.
Sorry - this is off-topic. The Wall Street Journal today explores the reasons for Goldman Sach's ability to deflect pain of subprime losses. While they mention that it raised questions about how it balances its responsibilities to shareholders and clients, a lot more time is spent applauding the bravery and foresight of Swenny, the former hockey player, father of four with an acid wit.
The jist is that while Goldman was still selling, buying and marketing cdo'S they were also shorting them. The problem I have with this is that the bosses of the guys who were doing both, based on the Wall Street article, were in constant communication with each other - sharing specific insights, knowledge which would strongly impact the value of these investments. Is it really too far a stretch to view this as insider trading? Add to this the enormous amount of shares which Goldman could manipulate makes such action even more appalling.
What exactly is the SEC doing these days?
(I've written to you because I value your judgment and enjoy your rational, balanced style of investing.)
missedit
Roger - interesting comment about the 130/30's, which I happen to share. Hoping you might write about that in the future - thanks.
http://tinyurl.com/2nsjra
I think people should keep an eye on housing. Depending on how much home prices fall will determine how much of a problem we end up with and how much we will want to increase our investments in things other than equities.
missedit, thank you for the kind word but you may not value my judgment after this reply.
Candidly, this issue is way beyond my span of control and time spent on an issue like this is time spent away from my primary mandate which is stewarding my clients' money.
Making a market in something for customers and trading that same something on a prop basis, on the surface is not something I have an issue with. If there was something improper they will have to face the consequence but I go weeks with out thinking about this sort of thing and I never worry about it.
Roy, the short and sweet on 130/30 is that it relies on too many things going right. In an actively managed situation that constraint, as opposed to just long short at whatever ratio seems less than ideal
Roger, if you were more certain, lets say twice as convinced as you are right now, that we are in a bear market would you be taking more stringent defensive actions?
Thanks,
Glass Onion
sorry, I don't know how to answer a question, "if i thought differently than I do now."
i view in terms of probabilities. I view it as high, the decline thus far has been slight and my actions thus far have worked as hoped for.
speaking of commodities -
"Does the average commodity futures contract
have an equity-like return? Our research suggests
it does not: The average excess returns of
individual commodity futures contracts have been
indistinguishable from zero."
http://tinyurl.com/3x5fyl
extra return? fair enough but on page 4 of the PDF, it says page 72 in the lower left, the correlation numbers look pretty good to me.
no extra return is ok if it gives equity like returns when equities themselves are struggling.
Interesting and helpful post today, Roger. Thanks very much. Sure was easier when the only alternatives were utilities, healthcare, and bonds!
we could add music royalty bonds to the list
"Allocation? Allocation? Allocation?
As a daily reader, I have been following some of your thoughts on currencies, commodities, etc and learning at the same time. I now know what I want to add in my portfolio but the real question becomes: by adding more movings parts, how to find the right allocation for each?
Vincent
I'll omit posting specific numbers to avoid any compliance issues, but you'll want to read this post:
http://boards.fool.com/Message.asp?mid=25060487&bid=100093
At the very least, IMO, that is how you want to approach the question with considerations of the "efficient frontier" using historical returns and correlations. That is a good starting point for long-term strategic allocations.
Get the Ibbotson studies on asset classes like REITs, commodities, precious metals, and review them in detail (they are available for free). The Ibbotson studies lead to the conclusion that they should be much higher percentage weightings then what is conventional wisdom (a few percentage points in each).
Once you have those strategic percentages, you can make shorter-term tactical adjustments if you want. For example, I am presently substantially underweight REITs based on current valuations and technical factors. I am overweight commodities relative to what I would consider a long-term strategic target allocation.
Roger,
One question I had. I thought if I wrote you could help me. In the paragraph on currency investing, you advised maybe not just buying the currencies of the countries that had rising currency trend, but buying just a basket of a bunch of them, because "at different times different ones will lead". This makes so much sense. But then you mention that we should be in individual countries not a basket. And that it was going to take a lot of work to be in the right ones. But would not the same theories hold true between the individual country currencies and individual country stocks?
Also, you did not mention cash, or money market funds. Would not a hefty portion of money markets allocation take some of the bumpy ride out?
Thanks for all you do.
G
George,
Here are the countries in my ownership universe (i may forget one or two); Australia, Brazil, Canada, Israel, UK, Ireland, Iceland, Ireland, Norway, Sweden, Finland, Russia, France, Spain, Vietnam, China (just for a couple of people for now). I am out of Chile but will go back in. I am interested in Egypt but have nothing there now.
These places offer diversification from each other in that the economies are different. Aus, Brazil, Canada, Israel, Norway, Sweden, Spain and China (for the two people that own it) has worked out very well.
Finland was looking great for a while and is now close to even. Vietnam has not done much this year net net. France and Russia, ehhh. UK, one stock great, one (a bank) lousy and Ireland has done poorly.
This against a backdrop where almost every country has done better than the US (Japan a great example of a stinker).
I have may have chosen my words poorly but I do think the countries listed take in all sorts of different things but I should not I did try to avoid a couple I thought would be bad like Japan, I also don;t think much of Germany or South Korea but of course they have both done well.
As far as cash, short answer is yes longer answer might be foreign cash and gold (moderate allocations of both) mixed in.
FWIW the cash portion in my Iceland account yields 10% or so and the USISK has a lot of the year between 60 64. The portfolio weighting to this space is small and so the occasional drop in ISK does not bug me.
-no extra return is ok if it gives equity like returns when equities themselves are struggling-
Hi Roger, the problem is that commodities, as measured by the Reuters-CRB, for the period 1991-2004, returned less than T-Bills. I can't eat low correlation. Commodity prices are volatile, and if an investment in the asset classs is expected to achieve T-bill rates of return, wouldn't you be better off skipping the asset class (Commodities or whatever) and putting your money in something that rewards you for the risk?
Jimidean,
great line "can't eat correlation."
A part of this boils down to philosophy and faith. Faith that blending together a bunch of different asset classes can produce an equity like return with less volatility over time.
I write about not liking certain things because they rely on too many things going right. I view diversification as being the opposite. If you own all the big ones in a given year one or two of them will be up a lot and will be the source of most of your return.
Market up 10% a diversified portfolio with 50 stocks being up 9-11% with one stock originally weighted at 2% being up 100% is very plausible as an example. That one stock wold account for a disproportionate amount of the total return.
In the real world there have been a couple of quarters in the last couple of years or so that I have owned GLD where it provided a disproportionate amount of my actual return. At other times it does nothing of course but from where I sit this works. I can't tell someone who disagrees they are wrong.
Hi Roger, the problem is that commodities, as measured by the Reuters-CRB, for the period 1991-2004, returned less than T-Bills. I can't eat low correlation. Commodity prices are volatile, and if an investment in the asset classs is expected to achieve T-bill rates of return, wouldn't you be better off skipping the asset class (Commodities or whatever) and putting your money in something that rewards you for the risk?
Say it was 1980 or even 1982, and one was trying to determine how much to allocate to U.S. stocks as measured by the S&P 500. What conclusion might one come to if they examined the time period from 1966-1979 (13 years like the 1991-2004 above) to make their decision?
Just my opinion, but I think using that particular time frame is misleading for forward-looking decisions because the 90s was a decade of substantial commodity price deflation. I think one has to approach the question with a more forward-looking mindset, or at the very least use a much longer past data set like what the Yale paper did (go back to the the late 50s which would include the strong upcycle of the 70s).
http://seekingalpha.com/article/57391-why-commodities-belong-in-your-christmas-stocking?source=feed
Roger, you said:
Here are the countries in my ownership universe (i may forget one or two); Australia, Brazil, Canada, Israel, UK, Ireland, Iceland, Ireland, Norway, Sweden, Finland, Russia, France, Spain, Vietnam, China (just for a couple of people for now). I am out of Chile but will go back in. I am interested in Egypt but have nothing there now.
My investments in currencies have been limited to currency ETFs and a little bit with MERKX.
What do you feel is the best way for the average investor to own currency in countries like Russia, Vietnam, China, etc. which don't, as far as I know, have ETF vehicles available to invest in their currencies?
sorry Derek, those countries are equities not forex.
beyond the rydex etfs and the iPath ETN it is difficult. Everbank will let you hold some currencies in either CD or interest acoount but i don't know the details beyond that.
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