Odd & Ends

Felix Salmon revisited an idea from a few years ago whereby foreclosed homeowners are allowed to rent the house they used to own at whatever the prevailing rent market is for the respective area.

One positive of this would be that it would be less of a life disruption for families who actually live in the house that was foreclosed upon. Very few people like to move and any children affected would not have to change schools. Another positive is that the houses in question would not be destroyed or otherwise vandalized on the way out. We all know it has been very common for people to cause a lot of damage, steal copper and whatever else. This would not happen if the family was going to stay, it would simply be a change in the title and a change in the occupants' relationship with the house.

The obstacle here would seem to be how many instances that the now-renter would not be able to afford fair market rent. Obviously there was some sort of problem with the mortgage payment and rents are now generally high relative to mortgages so the idea may not be able to work (if ever gets implemented) for logistical reasons. Fortunately I can't relate to this but the idea is innovative and we could use more legitimate innovation.

Barry Ritholtz had an interesting post about the history of the four secular bear markets of the last 100 years. Based on the limited sample size Barry says that we are probably a little more than halfway through and precedent says the low from March 2009 will be the low and unlikely to be revisited although he does not advise anyone hang their hat on those observations.

Of particular interest was the extent to which the "roller coaster ride leaves investors psychologically exhausted." It is reasonable and obvious that investors would be exhausted or some other word like maybe impatient or frustrated. Equity markets will start "working" again (although some foreign markets never stopped working) but in the mean time focus on what is in your control; saving money, having the proper asset allocation and planning ahead for the next market freak out so that you don't freak out with it.

John Hussman had the following nugget this week;

In our view, investors should presently hold risky assets only in the amount they would be willing to hold through the duration of significant downturn, without abandoning them in the interim. For buy-and-hold investors, that amount may be exactly the same as they are holding at present, but the choice should be a conscious and deliberate one.

The focus for me is not whether he is correct about what awaits the market on whatever timeline he has in mind but what the comment says about asset allocation. An important building block for asset allocation is having some idea of what the portion of your portfolio that is in risk assets could do to your bottom line and your psyche in some sort of March 2009 decline.

For example you utilities and staples stocks are unlikely to go down as much as the market in a serious decline. However things like mining companies and many types of tech stocks probably will go down more than the market in a serious decline. There will be certain environments where junk bonds will get pasted. The point is not that these types of things should not be held but to understand their dynamics relative to the markets. If most of your holdings have the volatility characteristics of a small cap coal company then you will go down more than the market. If all of your holdings have the volatility characteristics of Proctor & Gamble (PG) then you will lag the rallies. A blend between the two extremes can be constructed such that the portfolio is generally predictable.