So here we are again. Another G-20 Summit, Greece on center stage, the Euro trading like a seismograph and you, my dear reader, simply trying to cope.
Earlier this week we had the pullback I was expecting with the S&P 500 Index dropping about 5% in two days. Then we rallied back into Friday when traders dumped stocks again before the weekend. Along the way, we had the bankruptcy of MF Global, an on-again, off-again Greek Referendum and mixed signals on the viability of the Euro zone bailout plan. Who said it would be easy?
Of course, life can be a bit easier in the stock market if you are willing to ratchet down your expectations and “settle” for a 4-5% return. I guess right now, with the S&P 500 Index slightly negative for the year, 4-5% would look pretty good. The problem is when markets skyrocket, like they did in October, gaining 18% in 18 days, no one wants to settle for a measly 5% return. Am I right?
Now don’t get down on yourself simply because you are greedy. We all feel this way. When markets drop, fear reigns supreme. We all become conservative. The opposite occurs in up markets. The secret is finding that middle ground where both fear and greed are manageable.
As regular readers know, I have urged investors to stay defensive for the most part even through this rally. That means keeping a large part of your portfolio in dividend and income. Sure, there is always room for a few aggressive investments such as technology, precious metals, etc. but they should not be the majority of your portfolio.
Granted, you won’t perform as well as the market on those ripping up days nor will you lose as much on the dips. And if you step away from the daily, weekly and monthly gyrations of the markets and look at the longer term results, you will find that after several months of gut wrenching volatility, we are just about where we were at the beginning of the year.
Consider if your portfolio had been invested defensively since January? Your average return could have been 5-6% this year, way ahead of the market right now. This type of strategy really works in volatile times like these.
I am somewhat bullish on equities through the end of the year but I’m not expecting any big upside moves like we had in October (although I’ll be happy to take them if they come). I do expect a continuation of the volatility we have been experiencing throughout the year. Therefore you can expect 1-2% swings in the markets on a daily basis. By the end of the year, however, I would be surprised if we rallied more than 5% from the October highs.
That will be okay with me since I am being paid to wait out the markets’ volatility with a portfolio weighted heavily in income and interest. As more and more investors realize the nature of this market, they too will gravitate to this same strategy providing price support for my funds and your stocks. It may not be the most exciting way to play this market. But that’s okay; I could do with a little less excitement right now.