Unfortunately, it's next to impossible to pinpoint beforehand when the mood of the crowd will reverse from bullish to bearish. Therefore, I advise you to concentrate your energies on preparing rather than predicting. Here are four tips to help you put your portfolio into shape before the bubble trouble boils over:
At present, our model portfolio consists of 53% stocks, 47% fixed income. You're welcome to tinker with that figure, adjusting the equity stake up or down to match your own risk tolerance. In any event, though, you should be carrying a somewhat lower stock weighting than normal (for you).
Pare your holdings of stocks that have climbed to the top of their P/E range of the past five years. (You can find this information in the company's S&P tearsheet, available through the online research sites of most stockbrokers.) Subscribers of Profitable Investing know that we've been taking profits on some of the high-flying names of the model portfolio recommendations. Depending on your tax situation, you may find it advisable to trim other holdings as well, with a goal of buying back in another two or three months.
Besides high P/E names, you should exit—or at least reduce your exposure to—any stocks that fell by a larger percentage than the S&P 500 during the 2007–2009 plunge. Make it a priority to dispose of these high-risk holdings before year-end.
If the financial markets run into rough weather in 2014, you can be sure that 'yield assets' will hold up far better than pure capital-gains plays. On the fixed-income side of the ledger, I favor emerging-markets bonds as well as domestic preferred stocks and bank-loan funds. In the December issue of Profitable Investing, I share a couple of low-risk stock picks with you, plus new buys for the Incredible Dividend Machine strategy.
Once the stock market's year-end strength dissipates (probably sometime between mid-December and mid-January), I expect to recommend several hedges in my Richard's Journal blog (www.rband.com).
The simplest and safest is to buy long-dated Treasury bonds as insurance against an equity selloff. During the Dow's 2011 'correction,' for example, a typical long T-bond surged almost 35%, including reinvested interest.
Alternatively, we may buy some exchange-traded bear funds, such as ProShares Short S&P 500 Fund (NYSE: SH), for portfolio protection. Stay in touch with my Journal for specific trading advice.
Yours for Profitable Investing,
Richard E. Band
Richard E. Band is the newsletter world's #1 authority on investing for low-risk growth. His flagship Total Return Portfolio has grown sixfold since its inception in 1990, while taking far less risk than the popular stock market index funds. More »
Thanks Richard for being there for us on a weekly and monthly basis. We appreciate your consistently down-to-earth, sensible commentary and advice. We are in our 80s and still don't mind a little risk, but we want it to be reasonable, calculated risk. We have done well following your advice over the years. We take a small monthly stipend each month to augment our Social Security income and let the rest remain to increase our investments. We are better than "back to even" after the vicious downturns of the past few years.
–LPC, Camas, Washington