What To Do?

Many people have asked me what to do in this market environment, and I have sat and thought about it.  My own personal portfolio is around 60% equities, 15% my home, and 25% cash.

I think probabilistically.  I don’t focus on just one scenario.  I try to balance across a wide number of scenarios, and ask what will do the best.  In a foggy situation like today, that answer is not easy.

I will give you an example.  8.5 years ago, the leaders of my church came to me and said “Would you invest the money for our congregation’s building fund?”  My initial answer was “no.”  I don’t like investing money for friends, generally.  They came back again, and said, “Please?”  I felt ashamed, and said, “Okay, fill out this risk questionnaire.”  They gave me a series of answers that essentially said, “We don’t know when we need the money, but get a good return for us.”

Ugh.  In May of 2000 went back to Ben Graham’s 50/50 (stocks/bonds), and then adjusted it, taking 10% from the area of the market that I liked worst, and added it to the area I liked best.  I took growth stocks and sold them and bought long term corporate bonds.

Since then I have made further adjustments.  The current portfolio is:

  • 5% Energy stocks (VGENX)
  • 5% Gold stocks (VGPMX)
  • 25% International stocks (VINEX)
  • 25% TIPS (VIPSX)
  • 20% Intermediate Investment Grade Corporates (VFICX)
  • 20% High Yield (VWEHX)

Much as I like Vanguard, I am not endorsing any of their funds here; they are example for asset allocation.  I am very light on US stocks here, and intentionally so.  This portfolio has an anti-inflation bias, and will do better against a weaker dollar.  The corporate bonds, both investment grade and high yield, replace equity exposure.  Corporates are cheap relative to common stocks, and they have better protective characteristics as well.  Though I don’t have any closed-end corporate floating rate funds here, they could be interesting if their leverage was low enough, which isn’t common.  As for the international developed market stocks, a basket of different countries will likely do better than a simple US exposure, even if the dollar continues to fall.

TIPS have been a fatal attraction for me, and I hope to have a post  out in the near term explaining their value in this environment where inflation is negative for now.  My view is that the Fed will eventually monetize the debts they are incurring.  Also, as the dollar gets weaker, inflation will get imported back into the US.

What could go wrong here?  We could have a trade war, or the US government could take actions to protect the value of debt held by foreigners (not likely).  If the equity markets rally, investment grade corporates and high yield will not be far behind, but this portfolio would lag.

No portfolio is perfect.  This one certainly isn’t, but it is my attempt to position for what I view as a lousy economic environment that will eventually yield inflation.

Full disclosure: long VIPSX, and my church long what is listed above