|A time for caution
Thursday, May 19, 2011
As we cross the mid-point of May 2011, we have seen a very nice
market recovery from the lows of 2008-09 when the financial
crisis was at its deepest. Where do we go from here? And how
can we make money doing it?
Most major markets have recovered from depression like collapse.
Equities may be reaching danger point if you are buying in now.
Bonds are scary because of the interest rate situation (yields
have nowhere to go but up, which hurts bond prices). Most of
the gains made over the past few years have been in more risky/volatile
assets like energy, resources, precious metals and emerging
The U.S. is still bogged down by debt. Government stimulus
and record low interest rates haven’t jump-started the economy,
and the prognosis isn’t positive. Unemployment is too high,
housing hasn’t recovered, and the consumer weakened by poor
household balance sheets. How will the economy do on its own
without the benefit of government stimulus?
The European situation isn’t clear either, with much sovereign
debt due in 2011. Greece, Ireland, Portugal, and Spain are in
rough shape. As members of the common currency eurozone, they
can’t devalue their currency or lower interest rates to defuse,
devalue, or inflate away fiscal problems. Fiscal austerity is
ultimately really their only recourse, as Germany and France
will not fund bailouts indefinitely.
Emerging markets have large, young populations and growing
economies, but there are some concerns about inflation derailing
(or slowing down) their continued expansion. They have led the
way out of the recession, while the U.S. has stumbled along.
What to do
The reality is that equities might be at or close to highs,
bonds are scary, and the real money-making sectors are all risky.
That doesn’t leave you with many palatable options for investing
However, you can rebalance portfolios and perhaps take some
risk off the table. One solution is to look for dividends, which
pay you to wait.
Another is to dollar cost average your purchases over the next
year if you have new money to invest. This helps mitigate some
of the downside risk. You could also simply keep 20% to 25%
in cash in case of a correction.
Make certain your portfolio is well diversified. Equities and
various fixed-income instruments are only a start. Do you have
some gold, real estate, infrastructure, and emerging markets
exposure? Most investors need some exposure to these sectors
because most do not correlate closely to overall markets. Emerging
markets also give you access to where the lion’s share of world
growth will come from in the foreseeable future.
Be very careful about getting into precious metals and energy
now, even though I believe the fundamentals for these asset
classes are still good. When something goes up so much for five
years, you need to be careful getting in late. Now is not the
time to be greedy. Get greedy when markets are in crisis and
everybody else is selling. Markets (normally) punish greed and
Don’t be afraid to keep some cash or money market funds and
wait for the next opportunity. Patient investors are usually
rewarded. Investors who get in after great gains are historically
punished (technology in 1999 was a good example of that principle).
This is another reason why I tend to favour holding some real
estate funds. You get steady income, and the sector has suffered
recently, so you are buying when it is out of favour. Don’t
be afraid to be contrarian. History has show that an investor
who buys the previous year’s worst sector does better than one
who buys the sector that performed best.
At present, I am more pessimistic than optimistic, mostly because
of the strong recovery, European debt concerns, and multiple
problems in the U.S. economic machine. We have done well with
emerging market economies leading the way, but if demand slows
and a secondary problem arises (another U.S. recession, for
example, or the European sovereign debt crisis infecting more
countries), then things could get ugly.
Generic Mutual Fund Disclaimer
Commissions, trailing commissions, management fees and expenses
all may be associated with mutual fund investments. Please read the
simplified prospectus before investing. Mutual funds are not
guaranteed and are not covered by the Canada Deposit Insurance
Corporation or by any other government deposit insurer. There can be
no assurances that the fund will be able to maintain its net asset
value per security at a constant amount or that the full amount of
your investment in the fund will be returned to you. Fund values
change frequently and past performance may not be repeated.
Personal Opinions & Recommendations Disclaimer
The foregoing is for general information purposes only and is the
opinion of the writer. This information is not intended to provide
specific personalized advice including, without limitation,
investment, financial, legal, accounting or tax advice. However,
please call the author to discuss your particular circumstances.