Three months ago, veteran investment strategist Anthony Boeckh took a risk and warned of a serious stock market correction just ahead.
It never happened. What we got instead was a market rally in the final months of 2010 that helped secure a second straight great year for stocks.
Mr. Boeckh learned from this experience, and you should too as you prepare your portfolio for the year ahead. It's simply impossible for most people to accurately time the stock market's ups and downs.
"Trying to time a correction is really a mug's game," said Mr. Boeckh, co-editor of the Boeckh Investment Letter and author of The Great Reflation: How Investors Can Profit From the New World of Money. "I stuck my neck out calling for that correction a while ago and it's not really very helpful to people."
These days, Canadian investors are involved in what could be the biggest-ever experiment in market timing. Unnerved by the market crash of 2008, many people have gone way overboard on safe investments and retreated partially or entirely from stocks. They're waiting for less risky times that may never come.
This year certainly isn't shaping up as one to let investors relax. Mr. Boeckh is fairly bullish on the stock market's fundamentals right now, but he still sees the potential for a correction caused by problems ranging from the shaky U.S. economy to the debt problems of several European countries to global trade tensions.
"It's a very risky world out there," he said in an interview from his Montreal home. "A lot of things can go wrong on very short notice."
Investors, this is your life in 2011. So plan for it.
Mr. Boeckh has four decades of experience in the financial industry and was formerly the editor of a respected publication called Bank Credit Analyst. Today, he suggests that investors figure out how aggressive they need to be to meet their financial goals and then create a suitable mix of investments. For many investors, that's going to mean adding to their exposure to the stock market through mutual funds, exchange-traded funds or individual shares.
This plainly is not happening right now. Figures from the Investment Funds Institute of Canada, an industry group representing most fund companies, shows that people took $6.2-billion more out of equity funds than they invested in the first 11 months of 2010. People were actually more bullish a year ago, when year-to-date net equity fund redemptions totalled $3.3-billion.
Some of the money moving out of equity funds is going into balanced funds and wrap products with stock market exposure, so it's not like people are giving up totally on stocks. And yet, the consulting firm Investor Economics said this fall that the amount of money sitting in conservative investments was at an all-time high of $1.6-trillion.
Unfortunately, safe investments typically pay interest and, today, interest rates are still close to the historical lows reached in the financial crisis.
"The problem that people have, especially retail investors, is that they're faced with this continuing huge dilemma in that they get almost zero return on safe short-term liquid assets, while everything else has considerable risk," Mr. Boeckh said.
It's the risk of losing money Mr. Boeckh refers to here. Another risk you need to know about is not achieving your financial goals because your investments are netting you in the area of 1 or 2 per cent annually. Ultimately, you may retire poorer as a result, or you may have to retire later to keep building up your savings.
Interest rates are low, and the stock markets are risky. What do you do? Edge into the stock market gradually and selectively through regular monthly or quarterly purchases.
"I would start picking away at it," Mr. Boeckh said. "But I would be very careful on the selections [of stocks]and not be chasing something that has already been hot. Look for companies with good balance sheets and good management."
Some investors will find that they can make the necessary adjustments to their portfolio by selling some of the bond holdings and moving the money into stocks. Your personalized asset mix will dictate a set level of bonds. Hold to that, but get rid of the excess to protect yourself from rising interest rates in the next few years.
Think inflation's dead and rates can't rise? Mr. Boeckh's analysis is that U.S. inflation is understated by the housing market collapse. Take away housing and consumer prices are rising at close to a 5-per-cent rate.
Higher inflation will cause central banks to crank up low interest rates, and that in turn will cause the price of bonds and bond funds to fall. Bonds were a safe haven through the financial crisis and beyond, but they can hurt you in a rising-rate world.
"There's been a quasi-mania in bonds over the last couple of years," Mr. Boeckh said. "It seemed to be a no-brainer for people. But I think that game is over."
Gold is also cause for concern in Mr. Boeckh's view. He said it's okay to hold as much as 5 to 10 per cent of your portfolio in gold as insurance against crises of all sorts, but in his latest newsletter he wrote that "we still feel that precious metals markets are highly speculative and will come to grief at some point."
Mr. Boeckh's book, The Great Reflation, looks at what might result from all the money that governments have pumped into the global economy since the financial crisis. A notable beneficiary so far is the stock market, he believes.
Other positives for stocks include signs the U.S. economy is healing and the markets' resilience in the face of potentially destabilizing developments such as Europe's worsening debt problems and increased concern that China will raise interest rates (and slow economic growth).
Some reasons for caution include Mr. Boeckh's view that stocks are neutrally valued - "not really cheap, but not really expensive" - and, of course, the potential for a shock that starts a correction. Should you wait for a better time to invest? Go ahead, but recognize that even the pros can be off on their timing.
Anthony Boeckh's investing themes for 2011
"The key questions many of our readers are raising is whether the strategy of overweighting gold and bonds, which has worked well over the last few years, will continue to outperform stocks. Our view is that we are at a point where we will see stocks outperform substantially over the next few years."
1. The bull market for stocks is intact
-Stocks have shown remarkable resiliency in the face of several pieces of bad news
-The risk of a stock market correction from an economic or political shock remains
-Stocks are fairly valued after a runup since their lows of March 2009
2. Bonds are vulnerable
-Rates will rise as inflation builds (rising yields means falling bond prices)
-10-year U.S. Treasury bonds are probably heading to 4 per cent from 3.4 per cent in late December and 3 per cent at the beginning of the month
-Consider finding yield from dividend stocks
3. Beware gold
-Precious metals have momentum, but are speculative
-Silver has broken out against gold, which is reminiscent of the lead-up to the 1980 collapse of precious metal prices
Source: The Boeckh Investment Letter