I have been advising investing no more than 30% in stocks; that it’s best to be less invested than you normally would be at this point. As I watch things continue to unfold, however, I see the risk level continue to rise and now advise that it’s best not to be significantly invested in stocks for the time being.
For now, the allocation with by far the highest probability of success is to invest between 0 and 20% of your money in stocks, depending on your risk tolerance. Keep the rest of your liquid assets in money markets or short-term CDs, pay off all debt including car loans, make smart spending a priority, and rent rather than make a new house purchase. Unfortunately we are in a period when there is almost no reliable way to invest without very high risk in higher-yield investment alternative such as U.S. stocks, overseas stocks, real estate, or commodities.
I will be updating my advice and estimates on my Market Evaluations page in the coming week, but I wanted to insure you had an immediate heads up on this shift. In the meantime, here is a little more on my reasons for taking such a conservative stance at this time.
There has been lots of talk about whether we are looking at a double dip recession, but the truth is that the double dip is a myth, as we have been in and remain in a strong recession. The recovery was an illusion brought on by the actual and psychological impact of the waves of money thrown at the economy by the government. This stimulus is now over and hasn’t made true lasting improvements. This effect is most easily evident when looking at how the housing market appeared to have bottomed when the government threw billions at it, but as soon as the stimulus ended, the housing market just resumed its decline.
Here are some of the key factors we are and will continue to deal with:
Job growth is down, unemployment is edging back up, and real unemployment is at 17%.
- The housing market remains depressed, with national home values back to 2002 levels, and new waves of foreclosures on the way for years to come.
- The US consumer is tapped out, so increasing levels of debt will no longer help drive the economy.
- Unsustainable levels of government debt will be a major drain for years.
- Retail sales and consumer confidence are down, and over 60% of Americans now live paycheck to paycheck.
So, don’t sit around waiting for the economic recovery to happen as it’s likely to be a long way off. Although the stock markets may still go higher, the probability is far too high that sooner or later they will drop well below where we’re at now. The probability is also too high that a period of bad inflation is around the corner, driven by a big drop in the US dollar.
For what it’s worth, I currently have only about 5% of my money at risk in the stock market at this time and the investor I know and respect best other than myself is currently at about 15-17%. Normally we both run in the 50-55% range.
What I am recommending is unpleasant. I believe it is a lot better, however, than the losses that are likely if you take excessive risk at this time. Like it or not, you sometimes have to be patient and wait for the next opportunity. Please understand that the wait could be a few more months or it could well be a few more years, but also that those opportunities always eventually come.