According to well-known contrarian indicators such as the AAII’s bull/bear survey (American Association of Individual Investors), pessimism is at the extreme level that most of the time signaled a rally in the markets (see front page on left side of AAII website). Will markets start rising from here? Well, it helps that Asian & European markets are already up which bodes well for a good start today.
However, I don’t want you to try to become a super trader or go out and leverage long to the max – I would like you to see that investing in stock markets is much harder, and much more work than TV ads and pundits claimed it was back in the roaring 90’s and the mid 2000’s. In fact, the past 10 years have been humbling to many and follow the predictions back then that we were entering (at the time) a period reminiscent of 1966-1982 in which the Dow Jones Industrial Average started and ended the period at almost exactly the same level.
Therefore, it helps to be creative in such times – considering strategies such as merger-arbitrage which I wrote about a few weeks ago, and higher yielding investments which focus on current cash flow and reinvested growth such as dividend paying stocks, could help make sure that you have steadier returns, possible downside protection and perhaps even some total return gains if markets continue sideways for another few years.
No doubt there are economies in this world that are growing like the US did in the mid 20th century. However, a warning to the novice – even the US had massive fits and starts through its growth history – numerous huge economic swings and crashes come to mind. So even if your thinking is that you will invest in China for example, because they have lots of growth ahead, beware that in any year, they could experience the massive turmoil that can be expected as a growing economy tries to find its way.
With all that said, it seems that the moderate contrarian play at the moment (as opposed to the slightly contrarian or extremely contrarian), is to invest in markets since many think it will fall and have moved to cash. So where does this leave you?
Bottom line – if you are a prodigious saver, perhaps you can hit your goals at a lower assumed return rate – in other words make up for low stock market returns with simply more savings – and consider a moderate portfolio of ideas including perhaps the couple I mentioned above. If you want to go for more growth, consider with Professor Michael Berry calls “discovery investments” as a part of your portfolio (I will cover discovery investments some other time) and if you have a solid nest egg, and need to draw income, then consider a portfolio strategy that I sometimes recommend which is most eloquently stated by my former BU professor Francois Gadenne and taken directly from the RIIA website (of which I am a member):
To build a floor and create upside potential. We assume that during retirement clients need a sufficient level of income (“a floor”) from guaranteed or low-risk sources, as well as the potential for growth through exposure to riskier assets (the “upside”).
Of course I would also make a plug for seeing a professional advisor, and I suppose some of you will, but many won’t so I hope this has been helpful for you. If you do plan to seek out an advisor, you could consider us, inf you are looking for a financial planner in Medford, MA area (right next to Route 93).
p.s. Marc Faber, well known economist/financial expert, mentions the same points above in his latest Monthly Report.