Thursday, October 2, 2008

Model Portfolio

One of my very few readers, and very good friend JW, asked me to post what to do next, in this kind of "fooled by randomness" environment...

I have to confess that I simply don't know...

I do however remain fairly happy with the decisions that I have begun to make in 1999, when the stock market began to peak, post-Asian crisis (yet another random event). In fact, if you share my then acquired fixed-income philosophy, there are unique opportunities in this credit market.

First things first however.

My model portfolio:

Individual Muni Bonds 50%

Individual I-Bonds or TIPS: 10%

Individual GSE Bonds (now backed by the Treasury) Bonds: 5%

Individual Corporate Bonds: 5%

Individual Preferred Stocks: 5%

Equity (Stock and Equity Income Funds): 5%

Cash (CDs, Money Market, Currency, Stable Value): 20%

I continue to like the construction of this portfolio. The US stock market almost quadrupled between 1994 and 1999, the event that led me to the then increasingly attractive fixed income rates. It is impossible to know if and when the stock market will surpass its prior highs and so I prefer the guaranteed returns of fixed income even if I reserve the right to change my mind one of these days. I will let you know if I do...

In the meantime, the rates I like the most in this environment are from individual munis. A 20-year AAA paying a net 5.5% is nothing to sneeze at, and I can't see inflation going any higher, as we enter what may be more than a mild recession.

See you soon...