Rarely, I encounter an article in the financial press which is worth reading several times. The following piece by David Rosenberg is one of them. It is concise, logical, and presents a range of actionable items that investors may wish to consider, especially given the present state of equity markets here and in the U.S.
David Rosenberg: Here are 10 tips for investing late (very late) in the business cycle
Rosenberg reviews 15 economic indicators and concludes that we are in the late stages of the most recent expansion. It's time to undertake a thorough review of one's portfolio in light of this.
He concludes his article with some sage advice.
So how to invest?
Answer: Be aware of where we are in the cycle and act appropriately by having an optimal portfolio for this part of the business cycle:
1. Raise some cash — sometimes a 1 per cent yield on a three-month T-bill will have to suffice.
2. Reduce domestic cyclical exposure.
3. Focus on companies with strong balance sheets; low refinancing risks.
4. Cut the overall beta of the equity portfolio.
5. Screen more heavily on earnings quality and predictability.
6. Protect the equity portfolio by writing call options or buying puts.
7. Diversify geographically into markets that are in an earlier part of the cycle (many parts of Europe, Asia).
8. Step up investments in dividend growth/yield and in less economically sensitive parts of the market.
9. Credit hedge funds with attention paid to better quality should help preserve capital and provide a recurring cash flow.
10. Long-term bond yields (even zero coupon) never rise during a recession so no matter how low they are, then can indeed go even lower unless this game goes to extra innings.
I have adopted most of them, including reducing my exposure to what I consider are more vulnerable equity positions ... but not without some misgiving as I have negated the "opportunity" for potentially rewarding gains. At the same time, I have foregone the "opportunity" to experience losses and in so doing, have conserved my stash for more promising times.
As to timing: In my view, investing for most retail investors is a "long game" played in terms of decades with innings in the order of 3 to 5 years. Over the years, I've learned that "buy and hold" (with a few exceptions) is not the best strategy for me. As in sailing, you simple cannot reach a destination by holding one's course to a single tack. You alter your course in response to wind, waves and currents.
The secret is to prepare as much as you can in advance by consulting charts and weather forecasts and, always ... to have plans for coping on the basis of that information and, always ... to leave an excess of room for leeway. So, too, it is with investing.
I recommend highly, the articles written by David Rosenberg. His "batting average" (for great articles) is higher than most of his peers.
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