Einstein Portfolio Update: 30 November 2012

On this last trading day of November the Einstein comes up for its monthly review.  Overall, the portfolio is in good shape as all asset classes are within the 25% target limits set in the Dashboard of the TLH Spreadsheet.

Einstein Dashboard:  The purpose of these Dashboards is to quickly show the Strategic Asset Allocation plan for the portfolio.  In the case of the Einstein, we use all seventeen asset classes.  I am considering adding an 18th asset class which I would classify as Special.  A Special asset might include investments in energy, utilities, or even specialized individual stocks.  Anything that falls outside the current seventeen (17) asset classes would go into the Special asset class.  This possible addition to the Dashboard is still in the “consideration” bin.

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What To Do As Congress Debates and Postures

Investors are faced with many questions as Congress continues to waste precious time in solving what has become known as the “Financial Cliff.”  How are you going to handle your portfolio over the next few months and what are the best practices to follow?  My advice is to do very little to next to nothing, but to expect a bumpy ride.  When I say “very little,” I would not be adding large shares to any asset classes.  Let cash build.  “Nothing” means going about your investment business as usual and invest as if nothing is going on in the political world.  Going “off the cliff” will not be the worst event in history as cuts will go into action that neither the Democrats or Republicans would otherwise approve.  These cuts will be good for the deficit and could strengthen the market.  Granted, the different parties want cuts in different programs so look at this as forced compromise.

The real hurt will be placed on the middle class and the poor as tax rates will rise.  I expect the increases on those earning below $250,000 will be walked back.  The number may go up to $500,000 as recommended by Warren Buffett.  If the rates on those earning below $250,000 are not walked back the economy will shrink and we could easily go back into recession.  That is the game of chicken being played out by 535 elected officials.

If you are fearful no agreement will be reached among the two parties, one might place trailing stop loss orders (TSLOs).  I would set them at 2% to 3% to preserve capital.  Another move is to place TSLOs on only a few holdings within the portfolio.  This way one is hedging their bets.  Another possibility is to use the ITA Risk Reduction model.  Yet another choice is to purchase some short ETFs such as SDS.  This option only requires available cash and one does not need to sell off investments that you prefer to hold in the portfolio.

When investors look back upon this period five years from now, the visible action will likely be no more than slight wrinkles in a broad market graph.  Remember October of 1987.  That 22% drop in the DJI is barely noticeable now 25 years later, yet it was a real shocker when it happened.  Overall, this economy is improving and that is where we need to focus our attention.