The Big Picture For The Week Of July 16, 2006

I'll use this post to catch up on some of the questions/comments from during the week.

One reader left the same comment twice asking me to weigh in on whether I think the market has bottomed. No I don't. That being said trying to guess about the next 25 SPX points is just that, guessing. Minimizing the times you have to guess is probably a good idea. I have felt all year that the market would be down a little. I was lucky enough to catch the upmove and I have been reasonably transparent with the defensive steps I have taken over the last three months.

My 2006 prediction is the SPX finishes between 1180 and 1219 (the void on the BusinessWeek survey). This expectation would not motivate me to completely bail out of equities. I may take further defensive action but I hope it won't be necessary to get extremely defensive. And to make one last point, I hope I am wrong and the market sky rockets from here. I would be thrilled to lag a 20% move up.

I would also stress that I do not have much interest in trying to game such things as this. I have not demonstrated a real proficiency (have I?) for picking this sort of thing.

Tom in Indy weighed in that he is more interested in the Tour de Lance France than the market right now. This is a joke of sorts but mentally taking a break every now and then seems like a good idea.

Someone asked my thoughts on Macquarie Infrastructure. I started liking it shortly after it came out (about a year ago). I bought it personally and for clients (and still own it) and have been buying it for new clients. In the time I have owned it went up a lot and corrected back down. I have faith in the concept behind the product and Macquarie's ability to run these funds, they manage about a dozen (I believe that is the number) of these around the world.

There were some great comments left by OG, Londoner and others about benchmark selection and the idea of staying close to the market.

This is mostly old ground. Simple is a theme of what I try to write. Simple has drawbacks just like complicated has drawbacks. Proper diversification is more important. I believe in stocks, fixed income, cash, real estate (REITs included), commodities (the usual suspects and timber) and so on. I tend to think that averaging 10%, about what the S&P 500 averages, per year for people that save properly will do the trick for reaching financial goals. A way to look at this is what can you do to be close to 10% either way without having to be very right about a lot of things while hopefully giving yourself as smooth of a ride as you can.

A total market index would work as a benchmark, as would the MSCI Global Index. I do believe in benchmarking for knowing where you stand but I am not a slave to portfolio construction that is very close to the index.

One comment asked if the market is down 20% and you are only down 16% should you feel good about that. That situation did not seem ideal to the person leaving the comment. Since 1974 the S&P 500 has been 20% or more for two different years; 1974 and 2002. Obviously there have been other 20% declines during the course of given years but to make the point, in the reader's scenario the markets average annual return includes the years of down 20%. Beating the market by four percentage points in those two years adds 8 percentage points of return in you life time. More actually if you take the time to figure the compounding.

So while I agree with the reader that down 16% is far from ideal it is not the worst thing that can happen to you either. I would classify down 20% as down a lot and I am attempting to do better than a 4% spread in that situation but I may be unsuccessful. All anyone can do is have an exit strategy devised and then be disciplined enough to stick to it. If what you devise works 25% of the time you will come out way ahead of the market in your lifetime even if you are wildly mediocre the other 90% of the time.

Another comment was about time horizon in the context of just staying close to the market. Can a retired person who does not have time on his side afford to do this. Doesn't the retired person have to have less volatility is how I take the question.

I'll set aside personal tolerance for volatility as a planning issue for this and just focus on the numbers and how they usually work. If you are 60 years old (retired or not), healthy, with 95 year old living parents what is your time horizon? Jump ahead for this person ten years. They are 70, Dad died at 99 and Mom died at 103. My limited knowledge of actuarials says the person needs to plan on at least living until 105 (the average of Mom and Dad's age at death plus 4). At 70 this person has to think about their money lasting for 35 years. This will happen more and more and the more likely risk is running out of money due to being too conservative.

Properly diversified for your situation, always, but too conservative could be a catastrophic problem.

Sorry this was so long.