Tuesday, November 3, 2009

Investing Hint: Sometimes, Just Say No

So where do you put your money now? Stocks are uneasy, Treasuries are slipping back, gold and oil are dicey, and real estate is unpredictable. Corporate and muni bonds may be okay, but you have to be careful and selective. Simply buying a corporate or muni bond fund may get you a lot of garbage as well as gems. Asia, especially China, has enjoyed good economic growth, so perhaps you think Asian stocks might be a good bet. But one wonders whether the carry trade, now consisting of borrowing U.S. dollars at dirt cheap interest rates and converting them into another currency for investment overseas, isn't responsible for a lot of the pop in Asia. If so, it would be nice that the Federal Reserve is financing much of the resurgence in Asia. But the Fed may gradually withdraw its accommodation. And Asia remains export driven; it will be dependent on a strong U.S. recovery for long term growth, and few are expecting the U.S. to be the consumption wonder it was earlier this decade.

Sometimes, there are few or even no good investments. The fall of 2008 was one such time, when numerous investors came to understand why their grandfathers of the Depression era liked so much to carry a roll of $200 or $300 in their pockets. Cash felt good.

We may be entering such a time period now. There's nothing on the investment horizon that looks like a screaming buy. There isn't much that looks more than tepid. There's no law of investing that says you have be fully invested. Holding some or even a lot of cash is perfectly okay. Mutual fund and hedge fund managers often feel they need to be fully invested. But that's because they compete against other professionals. They don't want to run the risk of missing a rally and doing less well than other professionals. If a professional money manager stays fully invested and crashes into a bear market instead, that's usually not as bad because numerous other money managers suffered the same losses from also being fully invested. Just remember that most professional money managers don't even manage to beat broad market indexes like the S&P 500. So if you want to pretty much ensure that you won't keep up with the market as a whole, stay fully invested like the other losers.

If you have some uninvested cash, this may be a time to just say no to new investments. Take your time and wait for a good opportunity. If you hold cash for a year and miss out of turbulent markets, you may be better off. Even with this year's rally, the stock market is where it was in 1999, without adjusting for inflation. That's ten years of no gains (and indeed losses if you factor in inflation). If you had taken all your available capital in 1999 and put it in a money market fund, you'd be ahead today by a nontrivial amount. In the last ten years, the nervous Nellie turtles have beaten the hare.

Holding cash isn't a long term investing strategy, and it's advisable to go back into stocks, bonds and perhaps other investments eventually. This, of course, involves some market timing. But, notwithstanding all the expert advice against market timing, large swaths of the investing public do it. So do highly successful investors like Warren Buffet, and more recently John Paulson. There's no guarantee that holding cash now and for the next six, twelve or however many months will be more profitable than diving into something or other. But trying too hard can lead to mistakes. If you aren't sure that the goose you're looking at will lay golden eggs, keep your cards close to your vest and play them when the odds look better.

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