Author: Richard Moore
Covestor model: Market Comparables
For me, 2011 was a lesson relearned about maintaining a consistent investment approach. Throughout the year, I attempted to maintain a very low risk profile because of my readings of the various market indicators I use. For the first half of the year, I used a completely hedged approach, trying to achieve a small return while taking very low risk. However, the tremendous amount of trading I was doing seemed mainly to benefit my broker. I was indeed making money, but not enough to justify the amount of time and commissions spent.
Shortly after the middle of the year, I elected to abandon the hedged approach and, over a couple of months, simply moved to an all cash position. During that time, though, the market suffered some of its worst months of the year, especially for the smaller companies I tend to favor. At the end of the year, I was left with a loss of about 6.75% – a poor result when compared to the large-cap stock market index like the Dow Industrials or the S&P 500, but closer to the -4.2% return of the Russell 2000 small-cap index.
Looking ahead at 2012, I see two distinct possible outcomes. If the European situation does not resolve favorably and earnings estimates for US companies are reduced through the year, I expect continuing volatility with a definite downward bias for stock prices. But if Europe can muddle though without too much damage and the US begins to come to grips with its own debt and deficit, earnings can advance and stock prices could advance meaningfully.
My crystal ball is a bit cloudy, but I have developed a model that I intend to stick with this year. It uses earnings expectations (now neutral), sentiment (now somewhat negative) and valuation (now neutral) in order to arrive at an appropriate asset allocation figure.
Currently, that allocation is 25% to equities. This is a fairly risk-averse posture and I feel comfortable with a low risk approach at this time. I intend to use ETFs and stocks highlighted by my screening techniques in order to achieve my asset allocation targets. Hopefully 2012 will be a better year for investors.
