Monday, September 17, 2012

Avoiding the Portfolio of Doom

Last time I compared the current investing environment to an Indiana Jones movie.  So what can the average investor do to prevent his holdings from becoming the “Portfolio of Doom”? 

You must cross the high, rickety, bridge to the acceptable rate of return on the other side, without plunging into the crocodile pit below.  Here is some advice on how to do this. I am not a financial professional, however I do manage the GeoDon Fund, a portfolio of stocks and bonds that was originally put together by my grandfather George over 50 years ago.  The GeoDon is up 11.1% YTD vs. 15.4% for the S&P 500.  Not too shabby for a conservative rated fund.

Diversify and Then Diversify Even More

Diversification is needed by the average investor to prevent you from making big mistakes and to spread out your risk.  Because the current environment is so risky, you should diversify even more than normal.  For stock and bond people, this means putting $5000 into two stocks or bonds instead of $10,000 into one.   I know that this increases your investment costs, but paying extra commission reduces your risk is and this makes it worth it right now.

For mutual fund investors, if you are in three mutual funds in your 401-K (the minimum I recommend), consider now spreading your money into two or three more.  Just make sure the additional funds are solid ones.  Look at the five-year history and be aware of how they performed in the worst year because things could get nasty again.

Gold and Silver

Gold should be considered strictly a defensive action and this can be a valid strategy for some people.  Do not consider it a value generating investment.  If you lose money, you received a benefit from hedging against disaster.  If you make money, consider it insurance that paid a dividend.  To rely on it as an investment is the same as an NFL team expecting their defense to score enough points to win the game.   Also, it has been reported that Russia is hoarding gold.  This is driving up the current price, but if Russia decides to unload its holdings in the future, the small investor could get stuck.

Silver is like a gorgeous woman that flirts with you, deceives you, seduces you and causes you to fall deeply in love with her.  It is a sultry, steamy, romance until she crushes your spirit and leaves you poor and brokenhearted.  All the good things the commercials say about silver is true, but don’t be sucked in.  The silver market has a history of suddenly imploding for no reason at all.  A careful investor should avoid the “Silver Mines” when climbing through this wilderness.  And copper presents some danger also.  China has been stockpiling copper, so it could be overpriced and the risk of a future sell-off exists.


People always say “I wish I would have got in at the bottom of that one”.  Well there are two sectors that are very close to the bottom that offer a potential big upside:


Demand for clean water is expected to greatly increase in the future.  Companies that purify, transport and provide this water are still very cheap compared to their potential growth.   You can do the research to determine which are best.  I am planning to add a water company (or ETF) to my portfolio in the near future.


Uranium prices are still very low.  China, India and Turkey are expected to build many nuclear power plants in the near future.  In addition, even Japan is expected to replace its old, damaged, nuclear power plants with new plants featuring the latest in safety technology.  Next year, demand is expected to rise while supply, due to some unusual circumstances, is expected to temporarily fall.  This creates a potential for a big price spike.
Of course investing in uranium companies is very risky.  But the downside is limited because uranium prices are already depressed and should not go much lower.  I do have some money invested in two uranium companies.  Please do your own research to determine what you may want to do here.

Looking Under the Rocks

This tricky investment environment makes it necessary to look for opportunities in unusual places.  The quest to find good investment takes some creativity.  I have used my new “hyper-diversification” strategy to make small investments in two riskier companies, but there are logical reasons for both.

Can he be trusted with your money?
I invested a small amount of money in the Bank of Scotland.  The bank suffered during the European financial crush, but has made an impressive comeback.  I figure that the Scots are so tight with their money (I am allowed to say this because I am part Scottish) that after almost losing it once, they won’t risk letting it happen again.

I also invested a little cash in a Spanish electric utility.  Again this may look very risky, but it really isn’t.  If things totally collapse in Spain, the very last thing to shut down before all the lights go out would be, well, the electric company.  Until then, the stock is up 47% in two months and I can still sleep well at night.  Invest wisely my friends.

1 comment:

  1. Your idea: "For mutual fund investors, if you are in three mutual funds in your 401-K (the minimum I recommend), consider now spreading your money into two or three more."
    The concept of further diversifying is a good one, but this statement does it a disservice. Just buying 2 more mutual funds does nothing to automatically diversify your holdings. The 2 new funds could have the same or similar enough holdings to those you already own. 5 S&P 500 Index funds is not diversification. I know you know this, but not everyone who reads your post will.