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 nearly sixfold since its inception in 1990, while taking far less risk than the popular stock market index funds. More »
I have used the letter for 20 years. I have not followed everything. I take all cash for living, but all capital gains are reinvested. My investments have gone from 600,000 to 1,380,000. I currently have a yield at FMV 4.4 percent. I always try to make sure when I switch investments is that the new one has a better yield. I could not have done this without [Profitable Investing]. I have a base of pension and Social Security; my investment income from dividends give us a comfortable life.