One of the big reads at the end of every year has become Dave Collum’s Year in Review. If you think you know anyone who is bearish, you should them to this guy, who thinks “bear market” is an understatement from what we are going to face.
A bear market may or may not be around the corner, but Collum’s insights are not to be trifled with. His holistic thesis is one that’s been echoed by others, which is that the world is facing record debt, that quantitative easing is simply smoke and mirrors, that asset bubbles are growing all around us, and the music is going to stop at some point.
Doomsayers are nothing new to the markets, but all investors should have an idea of their risk tolerance and a portfolio strategy designed to weather even the worst of times.
The problem is that most investors have no such things in place, so now is a good time to consider what to do if the end is, in fact, near. Well, not THE end, but a bear market.
Collum tells us that his portfolio presently consists of 21% precious metals, 10% energy, 60% cash, and 9% equities. He is, in essence, hiding until (if?) things get really bad.
There are pros and cons to this approach and he’s very upfront about it. The downside is that he missed out on the stock market boom of the past few years which, his point is, are all built on a house of straw anyway. He also got caught up in the gold and oil declines that are causing portfolio pain.
The upside to this approach is, if a major bear market does occur, he (and you) will be extremely well-positioned. Energy is going to rebound at some point because the world always needs oil. Gold may or may not come back, but he is banking on the fact that we are in such dire fiscal straits that people will rush back into it.
Some folks who think a bear market is about to strike have gone short. Instead of selling equities and moving to cash, which will generate a taxable event and possibly put you on the hook for capital gains, they open short positions in the some of the indices as a percentage of their total portfolio.
For example, if you hold $100,000 in securities, you may choose to open a $20,000 short position in ProShares Short S&P 500 (ETF) (SH), ProShares Short QQQ (ETF) (PSQ), and/or ProShares Short MidCap 400 (ETF) (MYY).
The idea is that if the bear market does strike, you won’t be as hurt as you would otherwise be, and be less prone to selling your stocks in a panic.
Stay the Course
For me, there is no better security psychologically and financially than to hold a long-term, broadly diversified portfolio, stretching across numerous asset classes, and having a bear market protocol in place. You use options and swing trades to boost returns, and to hedge risk where appropriate. This is the approach of The Liberty Portfolio, which I’ll be launching soon (contact me for more info).
Maintaining a long-term diversified portfolio is easier than you think, especially with the bevy of ETFs now available. Diversification works. Case in point: during the financial crisis, the market was down 55% at its peak, but diversified portfolios were only down 25%-35%. That’s because not all asset classes were destroyed as badly as others.
It’s not like you will completely escape a bear market. You won’t find a short seller alive who shorts at the very top and covers at the very bottom. The point of investing is that you are choosing companies, sectors, and asset classes that will appreciate over time. The mistake most people make is that they forget they are investors during a panic, and turn into traders.
Don’t be like that. Stay the course.
As of this writing, Lawrence Meyers does not hold a position in any of the aforementioned securities. You can learn more about the forthcoming launch of The Liberty Portfolio by contacting Larry at TheLibertyPortfolio@Gmail.com