Apparently the Dubai Brothers may have trouble making their next interest payment and the initial reactions from many world markets has been bad.Ahem.
24/7 Wall Street provides a tidy recap and links out to some newsier articles for more info which you should take a look at.
This event is still unfolding and will either be the thing the triggers a meaningful risk-aversion trade or not but these types of events do happen periodically and they are not truly different in terms of how the market reacts even if the details are different.
Along the lines of risk-aversion, the other day a reader left a comment asking whether it would make sense to underweight volatile sectors in the face of QE ending or economic data getting worse and the like for fear that the market could drop as much and as quickly as it rose from March through to now.
I'm not likely to be the one to correctly predict a 60% move in either direction. For now demand for equities is healthy even if the economic footing in the US is shaky. When demand becomes unhealthy I will take more defensive action but for now I plan to increase exposure to investment destination that are on better economic footing. I view this as quite simple.
Decisions about sectors could be a little less important now than they were a couple of years ago. No sector is larger than 20% of the S&P 500 and none is so obviously and newly in trouble in the way that financials were (or are as the case may be). Tech is the largest sector of the market and I am a little skeptical of the potential for broad tech spending for a while so I am underweight there but not for fear of an implosion. I am still light on financials with 3/4 of that exposure being foreign as I do not believe the last shoe has dropped on the crisis. Materials can be a very volatile sector, depending on how you access it, but gold could do well in a risk aversion event so maybe the miners would too? Energy is a volatile sector but it seems to me I have read about energy doing well in both upturns and downturns so what is the answer there? Utilities are a tame sector but if part of the reader's scenario includes higher rates then I would expect utilities to struggle.
Right now I think country selection and avoidance is more important than sector weightings. Two years ago avoiding financials was the more important thing but now I think it is picking the right countries and avoiding certain other countries (big Western Europe and Japan). The list of countries I prefer is long and has not changed much over the last couple of years. I've been writing about the need to go narrower since I started writing. It has been important all that time and I believe will become increasingly more important as time goes on.
6 comments:
Just wondering why the rush into the dollar every time we have one of these events...I just don't get how investors view the dollar as a "safe haven". If anything it would seem to me to be an unsafe haven...any thoughts?
If everything panics lower the US dollar would perhaps fall less. Your comment seems to imply fundamental thought when this sort of thing is not about fundies.
I have been a long time fan/reader of your blog, Roger. I would appreciate it if you would take a look at a blog I posted recently on using a bucket strategy for retirement investing. Your thoughts and comments are welcome.
http://easyretirementinvesting.com/category/updates/retirement-investing/
It will be interesting to see if this is a one off event or a sign of the times. Greece is facing a similar situation. They are trying to get ahead of the situation, but it will be painful as they cut expenses to lower their debt load.
Regarding G Cook's "discovery" of a buckets strategy: his “bucket” strategy is a very thinly disguised version of Ray Lucia’s “Buckets of Money” strategy which Ray developed 20 years ago. He has a daily nationwide radio show discussing this strategy and he has written two books on the subject.
Ray Lucia, CFP, is one of the best known financial advisors in the country.
There is nothing new here…. I've been retired about a decade and have successfully been using Ray's "Buckets of Money" strategy.
Retiredinprescott,
I never claimed to have discovered the buckets strategy. If my blog implied such a discovery, then I apologize. That was not my intention. I simply wanted to determine if there was a quantifiable advantage to a bucketing strategy versus the traditional asset allocation approach with annual rebalancing.
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