2009Jun19 Home or Abroad; Fixed or Equity

This week’s poll results examine how we view the current market and its impact on personal portfolio decisions. The poll was not scientific and was driven by radio listeners of the syndicated Don Creech Radio Show and subscribers to its “Week in Review” email. Listen or subscribe at www.DonCreech.com.

 

Are you more comfortable in a stock portfolio made up of US companies or a portfolio with a global perspective?

 

A nearly unanimous 95% of respondents favors US domestic companies for their portfolio.  With a tendency to reduce volatility, a general reduction in international equity exposure would help. We do not expect long-term improvement in foreign issues until we find the US consumption improving and supporting better import demand.

 

Would you rather be holding an aggressive portfolio with returns that ran between -30% and +30% or a more defensive portfolio with returns that ran between -7% and +15%?

 

Respondents favor the more defensive portfolio by a margin of 3 to 1. This is consistent with behavioral finance theory. The reality of an aggressive portfolio and the negative impact has been illustrated this past year with sudden losses greater than virtually any portfolio model had assumed. The natural and prudent action is to exercise more risk control to retain current capital and gradually rebuild the portfolio.

  

Do you feel confidant that you will be able to recoup recent losses in your stock portfolio within the next two years?

 

Respondents are fairly evenly split between the optimists and the pessimists with 47% expecting recovery within two years. This will require some significant positive impact from the government’s stimulus plan. It will be competing with a major shift in consumer spending which is already in process. Over the next two years, the number of households with adolescents begins a protracted decline. This demographic cohort is the primary consumer spending group in our economy. When the kids leave home, parents typically spend less as they prepare their finances for eventual retirement. It is unlikely that the stimulus plan can trump the changes in stages of life that are occurring in the US.

 

Have you given up on stocks for long term growth and switched to fixed income?

 

Roughly two thirds of respondents have switched their portfolios to favor fixed income assets. Except for Treasuries which have been priced at premiums lately, fixed income assets, selling at attractive discounts, have been a reasonable alternative to equities. The combined return of interest and potential price appreciation have made high quality bonds as attractive as long-term stock returns but with lower volatility factors. As a strategy, recovery may not be as fast as a stock portfolio, but the certainty in these uncertain times is greater.

 

Going forward are you more comfortable with index investing or actively managed investments?

 

Respondents are, again, almost evenly split with 43% still committed to index based assets for their portfolios. The 80s and 90s were the two best decades of the past century for index investing. With only a few brief interruptions, the market trend was positive for long-term investors.

 

The advent of the Tech Bubble and Credit Bubble bursting has placed us in a new market environment. Consumer spending has shifted to stages more in line with the demographic make up of the US in the 70’s and Japan since 1990. This consumer spending change suggests more volatile and lower growth markets implying a greater advantage for active managers.