In 20 years as a financial adviser, this market is by far, the most difficult to predict. It is almost entirely event driven with breaking news dictating massive and unpredictable global stockmarket losses. Last week I was on the trading floor of BGC and a client remarked that he could remember when a 2.5% loss was considered a bad day. Now we are almost immune to losses in excess of 5%.
The dilemma we face (as ever) is one of where to invest and when.
With savings plans, making initial profits is less important because profitability is gained as much by unit accumulation via discounts through negative performance as it is by fund gains. However this is true only of newer plans. More mature regular contribution investments (over a year old with established profits) should have their gains protected and placed in cash. It is the new money that should be invested with an eye to volatility. Dollar cost averaging does work if monitored. The opportunity at the moment is one of value and a much lower average strike price than could be had for many years. The extreme volatility being experienced now will pay off handsomely for the smarter investors who stay the course. Regular savings plans are designed to benefit from volatility.
Personalised portfolios' however, are a different and more complicated issue. They have an absolute value on a given day and are much more difficult to dollar cost average. Therefore it is natural to err on the side of caution in order to protect the investment.
So far in 2008, our strategies have worked. We only buy assets that can be traded intraday with little or no spread. Alternatively, we buy currencies.
Presently, we are holding gold bullion via the GLD ETF and currencies. As you may know from previous posts we have also bought Ultrashorts in the recent past.
So if I gaze into my ever murky crystal ball, what do I see?
As aforementioned, this is a particularly difficult market to predict. So we have to consider what we actually DO know. We do know that we are about to go into a recession. This recession (like all others of it's ilk) will hit mid-caps harder than blue chips.
If the chairman of GE needs to raise money for his corporation, he has options other than calling his bank manager to extend his overdraft. Blue chips are fortunate in that they do not have to go to the bank for a loan to raise cash but can use convertibles and high yield bonds etc. Mid-caps need either a friendly bank manager or a committed group of shareholders. Therefore, it seems logical that mid size companies will be under greater pressure during the credit crunch/recession.
To take advantage of this we will look at a longer term acquisition of the Russell 2000 Ultrashort (TWM). We will also look at shorting the DJ Basic Materials Index with SMN.
Personally, I believe that this market will strengthen in the short term with a correction due December/January. The strengthening will be because of the effect of the bail out upon the banking industry and will bolster all indexes, thus weakening the UltraShorts. It will also be a reaction to the extreme recent negativity in global equity markets.
This will weaken the shorts. At that point we will look for a value point within them and take an underweight position.
Gold or as Spandau Ballet once sang "GOLD!", is looking very attractive at present levels. Presently trading at $729 per ounce with the GLD ETF priced at $72.18, now is a great time to buy, even if gold drops further. Please remember that GLD buys physical gold held in New York by HSBC. It is not a paper investment. Please see a previous posting below which reports that even though the gold price is dropping, gold sales are rapidly increasing.There are trillions of dollars spent or to be spent to bail out the banks. This will naturally devalue the dollar. Inflation (despite falling energy prices) is still rising at record levels as is personal debt. The argument that stagflation will engulf the world economy is becoming stronger. This is a perfect storm for gold investment.
Again, we will hold gold and look to accumulate in the medium term.
There are investment opportunities to come. We intend to take advantage of them.
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