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Buy and Hold, or time the market? 

The answer is being debated daily on CNBC or Bloomberg TV by guests, analysts and experts.  I do not believe it is a binary answer.  My personal opinion is buy and hold over periods of time with relatively rare events that drive dramatic re-allocation (significantly sloped movements above 200 day moving averages are one indicator to mark candidate events).  The mortgage, housing market, and  banking crisis of August 2008 – March 2009 was certainly one of those events.   The summer and early fall 2008 was the time to have a reallocation to a “conservative” portfolio done and complete.

March 6, 2009 will be the day looked back as “the bottom”.  Do a 3 month or 6 month chart of virtually any stock today, and you will see a “V” figure from January – March (down), March – June ( up ).  I waited until April 3 to reallocate, with additional reallocation May 1, and completing the last leg May 15.  But what about post June?  What about today? 

I still like the same stocks / funds today as I did on on April 3.  They fit into three categories:

• International Stocks
• US Midcap stocks
• Commodities

The above reallocation has performed (very) well,  and will  continue to perform well as long as the set of assumptions that have made them successful to date remain.  What are they you might ask?  Let’s take a look:

1. Interest rates remain low.  With the Fed wanting banks to recapitalize themselves, a steep yield curve ( lower short term yields,  higher yields on longer term bonds ) is likely to remain for some time.  A steep yield curve is a “money making machine” for banks and financial institutions ( borrowing at near zero, lending at higher rates ).
2. Depreciation of the dollar.  With international economies coming out of “the crisis” faster than the US, and the vast amount of  additional dollars injected into the banking system, the dollar is not likely to climb unless another “crisis” presents itself ( resulting in a flight to safety ).  When the dollar depreciates, international stocks return positive returns even in a flat market ( because the international assets are worth more dollars over a given period given a dollar that is worth less today relative to the other international currency than it was last month ).
3. The US and international economies continue to stabilize ( a positive first derivative on quarter to quarter comparisons of growth ( even if comparing two negative numbers ).  This is likely to continue through the Fall of 2009 at a minimum
4. The areas “hit hardest” will have the “best returns” in a rebound ( financial stocks fit this category ).  2007 – early 2009 will be a 50 year event on “hit hardest”.  If you believe that, then the premise of a 50 year event appreciation in certain sectors follows
5. The prospect of positive first derivative quarter to quarter comparisons of inflation ( even if comparing two negative numbers during the early part of the recovery ). 

So, given the above, what are my favorite equity picks:

• LZEMX – Lazard Emerging Markets fund.  It has a 47% YTD return, close to 80% if comparing March 6 -> present.
• TMGFX – Turner Midcap Fund ( US Midcap fund )
• XLF – Financial Services Spider fund
• BAC – Bank of America.  While it was down to $5 at one point, it is still less than half of what it was a year ago.  Had the good fortune of starting to get in at $7.50 (currently $16)
• USO – Oil commodity fund whose performance is supposed to track the price of oil. 
• SIVR – Silver commodity fund whose performance is supposed to track the price of silver

There are a few others of interest ( such as “C” (Citigroup), and commodity exchange traded funds RJZ,  DBA, but the above six comprise the bulk of the reallocation on April 3, and feel those same picks remain as valid today as on April 3. 

I would like to thank numerous appearances by Mohamed El Arian ( PIMCO ), and Jim Rogers on CNBC and Bloomberg over the past six months for allowing me to map this “financial crisis” to one of my more important personal beliefs – “With every change comes opportunity”.

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This entry was posted on Saturday, August 8th, 2009 at 3:24 pm and is filed under Stocks. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.