Re-Allocate?

Markets dropped more than 6% last week because of problems in Europe but rallied 3.4% on Monday and Tuesday because European problems were going to be solved. Wednesday trading started strong to the upside but fell apart because Europe started to look worse again. The US Treasury is issuing (selling) longer term treasuries, and the Federal Reserve has decided to sell short-term treasuries and buy longer term treasuries. If I’m reading that correctly, wouldn’t it be easier for the Treasury Department to sell directly to the Federal Reserve? That would really show those markets!

Yogi Berra when asked into how many pieces he wanted his pizza cut, said, “Four. I don’t think I could eat eight.” Yogi’s comments seem reasonable and downright sensible at times like this. I’m suffering from data overload. I’m pretty sure that the group of twelve responsible for agreeing on budget cuts sufficient to avoid draconian cuts that will be triggered by the interim debt ceiling measure are hard at work trying to accomplish something, but there’s not much news about them. I’m grateful there isn’t because there isn’t any room left on my legal pad.

At a meeting today with clients, we were asked if asset allocation plans shouldn’t be revisited more frequently rather than written in stone and forgotten. We have been hearing that concern a good deal lately from clients.

Asset allocation decisions are typically longer term decisions that do not require constant tinkering. They speak to one’s perspective on appropriate risk and investment discipline. While a review to ensure that the account allocation design is consistent with the account’s goals is always prudent, we find it is also a bit of a sneaky way to try to market time. Folks typically want to reduce their equity exposure when equities are getting beaten-up and they’re losing money, or they want to add to their equity allocation when share prices are soaring.

The US and Global economies are enduring a pretty rough period of anemic and fragile recovery. There isn’t a lot to feel good about, but the world isn’t ending either. Keeping one’s perspective and even-keel is vitally important. Temptations to sell or to stop contributing to 401k’s abound. Our strong suggestion is to reject the emotional tugs, return to your investment plan, and be dogged in your dispassionate discipline.

My new book The Arrogance Cycle analyzes the risks of too much and too little confidence. We are just a few days from our quarterly calculation of The Arrogance Index and from your responses to the Arrogant Survey, and we expect that the trend toward humility will continue. This is a positive sign for would-be investors. Realistic views of markets, economies, and company valuations are emerging. The environment is improving. Warren Buffet bought back shares of Berkshire Hathaway stock last week because he thinks it represents good value at these prices. He is not trying to make a quick buck but is likely making a prudent investment even though the price may decline in the near term. There are no sure things in investing, but perspective, discipline, and the courage to part form the crowd will leave you in good stead.

Hang in there.

Peace,

Michael