My Hopes for 2009 Have Suffered a Setback

John Maynard Keynes, the British economist of whom we're hearing much these days, was criticized for changing his ideas concerning monetary policy as a result of the Great Depression. He is said to have responded to his critic: "When the facts change, I change my mind. What do you do, sir?"

I'm here this month to admit to a change of mind. Just last month I laid out for you my personal investing strategy for 2009. By my own admission, it was a "bold" strategy that embraced a "more aggressive posture." As I explained, I was comfortable with that approach "given what I wrote [in January of this year] about markets and recessions."

A mere 30 days later I'm returning to recant. What has happened in the interval to bring about this reversal? The facts on the ground, as I see them, have changed dramatically in recent weeks.

As a result, I no longer have the same degree of confidence that the recession will end this year. It still could, and I surely hope it does, but I'm no longer willing to position my portfolio in a way that relies heavily on that happy outcome.

Entering 2009, I made several assumptions about government policy under the Obama administration which now appear to be erroneous. For example:

• I assumed the $700 billion in TARP monies authorized last fall, an apparently necessary evil I grudgingly accepted, would be spent intelligently. As the stated objectives have repeatedly changed over time, it has become increasingly clear there was no coherent strategic plan. There has been a lack of transparency as to what was being done, why it was being done, and no announced benchmarks for evaluating whether what was done was truly effective. This started under Bush and has yet to show any promise of getting better under the new Obama team.

• I assumed the new "emergency" stimulus plan would be designed to truly boost the economy in 2009. Instead, it turned out to rely heavily on traditional government spending and financial aid (almost two-thirds), and was short on tax cuts and other job-creating strategies. Yes, there will be some positive impact on this year's GDP, but not nearly what it could have been. And the $787 billion price tag is appalling.

• I assumed, naively, that the apparently serious nature of the "crisis" would generate at least a little bipartisan cooperation during the early months of the new administration. Instead, it's been political business as usual with power plays, harsh rhetoric, and corruption and incompetence in high places. Unfortunately, there has been nothing to date that I would classify as "change we can believe in."

• I assumed the stock market would respond favorably to the torrent of new money being spent on shoring up the economy. Instead, each time new legislation is announced or passed, the market renders a negative verdict. Washington has yet to convince investors that it knows what it's doing.

So, we have a disappointing start to the new year. The worst may be over, but I'm no longer comfortable with an aggressive personal strategy that needs it to be.

I'm adapting in two ways. First, I'm reducing risk by moving back to the 60% stocks, 40% bond portfolio allocation that we typically recommend for someone my age. And secondly, I'm moving one-half of my SMIFX Upgrading money back into the more conservative SMIVX fund. Both of these incremental changes promote the goal of preserving capital at the possible expense of greater profits should the market bottom out soon.

It's good to be open to changing one's position in the face of new evidence, but not so open that each new day's revelations cause one to question one's basic premises. It's a balancing act. Please note that I'm making marginal changes, not moving away from Upgrading as my preferred investing approach.

As always, I want to emphasize that nothing about my personal portfolio, which reflects my age and a host of other considerations, is intended as a general recommendation to SMI subscribers. I'm sharing this only in the interest of transparency because the personal strategy I detailed for you last month has been adjusted.

Obviously, I hope my caution proves unnecessary.

• SMI Editorials page
• Making the 'Right' Investing Decisions in 2009 — and Beyond
• Obama Prepares to Put His Stamp on Economy, Tax Code
• Where Does the Money Go?

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