Shell-Shocked, but Ready for the Challenges and
Opportunities of a New Year
Like most investors, I was brutally mistreated by the markets last year. I also made a few missteps on my own, so Wall Street can't take full credit for the 30%+ loss in my retirement account.
While this isn't the kind of result you like to see in your portfolio at any time, it's especially irksome when you're in your 60s as I am. The diversification strategy I used last year failed to provide much safety because the decline in stocks, both here and abroad, was so broadly based there was no place to hide.
What is my response to the fiasco that was 2008? One way to go forward would be to further increase my fixed-income allocation. Last year I planned to allocate 40% to bonds; perhaps this year it should be 60% or more to position my portfolio even more defensively. This would be a reasonable strategy if (1) my current asset values are sufficient to carry me through retirement, and/or (2) a portion of the assets was going to be needed within the next five years.
Neither of these is true in my situation. So, given what I wrote about markets and recessions last month, I'm going in the other direction — I'm lowering my bond portion to 20% and allocating a bold 80% to stocks.
Yes, there could be more market weakness in store, but I'm wired to be optimistic. In any event, this is merely my personal outlook for 2009; it isn't intended to be a roadmap for anyone else to follow.
As for the 80% I'm putting into stocks, I will continue to diversify among strategies, although not as extensively as in the past. This year, in a move toward more simplicity, I'm dropping Enhanced Just-the-Basics as a portfolio component. I haven't lost faith in the strategy at all; I just want fewer funds to supervise and less paperwork.
Here's the new lineup:
• 20% in fixed-income funds. Given the current interest-rate environment, I'm more concerned about bond losses than I am maximizing my interest income. That means I'm sticking with short-term bond funds and money markets.
• 48% in SMI's Upgrading strategy. Upgrading again receives the lion's share of my stock allocation. If I chose only one strategy, this would be the one I would follow (and would recommend to you).
I'll be doing my Upgrading this year via the Sound Mind Investing Fund (SMIFX). Last year, as a defensive move, two-thirds of my Upgrading money was invested in the SMI Managed Volatility Fund (SMIVX) due to its expected lower degree of risk. That paid off, as SMIVX lost about 10% less than the market. This year I'm reverting to a more aggressive posture and using SMIFX exclusively. Those Upgraders who fear further declines may prefer to go with SMIVX in 2009.
• 12% in SMI's Sector Rotation advanced strategy. This high-risk, high-reward approach has an eye-catching track record. But because of the volatility, we recommend limiting any allocation to a small fraction of one's portfolio.
• 20% in my market-timing strategy. The goal here, relying on my 12 years of market-timing experience from the days when I made my living as a money manager, is to preserve capital during bear markets.
That's the theory, anyway. It didn't work for me in 2008, partially because two of my indicators didn't perform well, and partially because I use leveraged index funds when I'm in the market (so when I'm wrong, I lose twice as much). Fun stuff. But I'm game to try again.
So, for better or worse, there's my personal plan for 2009. What's yours? You don't need to do anything as complicated as this; using the Upgrading strategy alone is sufficient. The most important thing is to match your stock/bond mix with your risk temperament and long-term goals, and to follow your strategy consistently.
The key to success is in being faithful. Self-discipline is the ability to do the right thing at the right time every time. By the "right" thing, I don't mean always making the most profitable decision. That's impossible. Rather, I mean the right thing is to ignore the distractions of news events and well-intentioned advice and stay with your plan.
If you haven't done so already, take time to develop your plan for 2009 and put it in writing. It's sure to be a better compass for decision-making than your emotions as the year unfolds. 
- SMI Editorials page
- Not Sure What the Experts Are Up To, but Here's What I'm Doing in 2008
- Reflections on a History-Making Year for the Economy and Markets
- In Search of A Silver Lining
- Should I Try Market Timing?
- 2009 SMI Allocation Guide: Weighing The Risks
- SMI's Investment Temperament Quiz
- Your 10 Most Important Financial Moves for 2009
- Introducing the Sound Mind Investing Fund
- Introducing the Sound Mind Investing Fund
- SMI's Enhanced Just-the-Basics strategy
- SMI's Fund Upgrading strategy
- SMI's Sector Rotation strategy
- Got a question or comment about this article? Discuss it on our Message Boards.
- Refer A Friend to SMI and for each one that joins, you'll get two free months of SMI!
