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Friday, July 11, 2008

Dumb Luck Investing Update

There is no denying it; the stock market is officially in bear territory. All that is left to discover is how low it can go, and for how long.

No money has been added to my investment portfolio since I retired, which was part of the plan. If I did not have “enough” money, it would have been silly to retire. The intent was, and remains, for the portfolio to be self-sustaining.

My modest portfolio consists of fixed income investments and mutual funds. Some are inside a tax deferred 457B plan from my former employer; some are in a taxable account. I try to keep the allocations balanced wherever they reside, which is hard to do since the 457B plan does not have the sectors that I can play in the taxable account. I live strictly from my meager pension income; none of my personal savings is considered part of my investment portfolio, nor is the equity in my home. I have been very blessed; my personal savings has gone up a squeak in the 11 months since I retired, much of it due to old-fashioned frugality.

Now that the DOW, NASDAQ, and S&P 500 have all dropped into bear market territory, it is time to review my dumb-luck investment strategy. My portfolio is down only 2% during the same period the major market indicators have dropped over 20%. I would prefer that dumb-luck earn me buckets of money, but in this economic environment, I’m very happy only being down only 2%.

Excluding junk bonds, fixed cash is around 55% (and barely earning anything). Junk bond exposure is down to around 10%, all junk funds that held substantial GM notes are now closed out. Domestic stock fund exposure was increased to 33%, mostly with money from the sale of the junk bonds. Foreign stock exposure currently is around 2%. All of the moves that I made into the market were on days of dire market weakness. I still limit myself to one move per month, with a maximum dollar amount for that move.

Since much of the junk bond market holds paper from companies that have not been fiscally responsible, I expect to close myself entirely out of the junk bond funds in the coming months. There probably is money to be earned in junk bonds, but for now, I have lost faith.

I expect (but do not predict) this bear market will trade in a choppy range for at least a year. Any purchases I make will be on days when there are few buyers. I don’t pretend to know what downside risk the stock market has in the coming months, nor do I have any clue when the bull market will return. My personal tolerance for portfolio risk will bottom out around 50% fixed income, 45% domestic stock funds, and 5% foreign funds. Some REIT (real estate investment trusts) funds are looking attractive, but are still scary. The 457B does not offer them, so any play I might make with REITs would be taxable, and more than likely a very long-term play. Some “experts” are saying healthcare looks attractive at these levels, and I might tag along with them there. I have more studying to do and more coins to flip.

My days of playing individual stocks are gone, probably forever. In the 457B, my choices are from their selection of index and managed funds. My taxable trading account moves are almost exclusively ETFs (exchange-traded funds).

Obligatory disclaimer: None of the above is investment advice. The dumb-luck investment strategy is not an art or a science, and only those with questionable intellect and low moral character should attempt it; it is not for the sane or sober.

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