My portfolio is in a very conservative posture, even by my normally conservative standards. With the sale of SPDR S&P MidCap 400 ETF (NYSE:MDY)� in early January, I�ve now got 49% of my portfolio in bonds and cash equivalents — my heftiest weighting in these defensive instruments in 22 years.
It�s not that I�ve given up on stocks or turned bearish on America. In fact, I think there�s a good chance I�ll be buying aggressively again sometime later this year. Meanwhile, though, I want to preserve my capital until the evidence suggests the potential rewards in most stocks handily outweigh the risks.
When will that be? It�s difficult to pinpoint the day or the week, but I�ll be looking for several things.
A drop in the headline stock indexes (such as the S&P 500, the institutional benchmark) would improve values. According to my proprietary valuation model, the S&P at 1,033 would be priced to deliver a long-term return of 9.6% a year — the market�s average since 1925.
Alternatively, a pickup in corporate earnings growth or an easing of Europe�s financial stresses, combined with a more modest pullback in share prices, could make equities attractive again.
For now, I�ll stay cautious. It�s a policy that kept me in the black last year, when many prominent investors nursed heavy losses. (My portfolio gained 2.5% in 2011.) I�m confident �safety first� will pay off in the opening months of the New Year, too.
Outlook and Strategy
Here, in a quick sketch, is my outlook and strategy for my portfolio:
Stocks, which make up 51% of my total portfolio — down from 56% last month — pushed their year-end rally into January, with the S&P reaching the 1,300 to 1,325 zone I�ve anticipated as a ceiling for the past several months. At this point, it would be natural to expect some kind of pause or consolidation, initially on the order of 3% to 5% from the recent index highs.
Strategy: I’m still buying a scattering of stocks. At current market levels, though, I’m doing more selling on balance. On Jan. 10,� when the price touched $165, I sold MDY. From my initial purchase in September 2008, MDY handed me a 21.8% total return. As part of my MDY sale, I shifted 5% of my portfolio to Weitz Short-Intermediate Income Fund (MUTF:WEFIX).
Enerplus Resources (NYSE:ERF), a Canadian oil-and-gas producer I�ve recommended before, launched a C$300 million stock issue Jan. 18. As often happens in such cases, the share price dipped, presenting a nice entry point for new money. Enerplus, which has a sizable foothold in the rich Bakken shale oil field (North Dakota), is growing steadily, with a 10% increase in production slated for 2012. Current yield: 9.2%. Buy ERF for income.
Besides oil, I consider gold and gold-related assets to be an excellent hedge against the ongoing reckless monetary policy of the Federal Reserve. Bullion serves primarily as insurance against the unthinkable (collapse of the banking system, runaway inflation, etc.). Thus, the percentage of your portfolio devoted to gold coins and other forms of bullion should reflect the odds you place on a disaster scenario — less than 10%, in my view.
For capital appreciation, on the other hand, gold-mining stocks look particularly appealing right now. Some senior producers with well-defined growth prospects are trading at P/E multiples that would be cheap even for a stodgy industrial business (which gold mining most certainly isn�t!).
Barrick Gold (NYSE:ABX) is quoted at a mere 8X estimated 2012 profits. Buy ABX.
Newmont Mining (NYSE:NEM) plans to expand its gold production even faster than ABX over the next few years. At 10X forward earnings, it�s a bit more expensive, but still a bargain compared with its average P/E of the past five years. Current yield: 2.4%. Pay up to $62.80 for this niche investment.
Fixed income makes up the other 49% of my portfolio — up from 44%. But, here�s a conundrum: If business activity is revving up, why is the 10-year Treasury yield skulking only a stone�s throw away from its historic low of 1.7%, set last September? Either stocks are right or bonds are right — both can�t be right. My guess is Treasury yields will record a belated blip in the next few weeks (to perhaps 2.2% to 2.4% on the tenner) before sliding again in the spring as the equity market gives back some of its recent gains.
Strategy: Avoid Treasuries except as a short-term hiding place when stocks are in turmoil.
This month, I’m drawing down my stake in bank CDs by 2% and shifting that amount to global bonds (emerging markets). CDs still make sense as part of my last-ditch reserve, but my portfolio already holds a large slug of bonds with short maturities via WEFIX. With the Federal Reserve promising to keep money market rates �exceptionally low� through mid-2014, we can afford to increase our weighting in emerging-markets bond funds, which typically have an average maturity of 10 to 12 years.
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