If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
Ned's Notes: "Chicken Investing"
11/04/2005 12:00 am EST
"I’m a chicken; I take the most conservative route," says Ned Riley, one of the most highly respected advisors in the financial industry. Here, he offers a straightforward assessment of the economy and a simple to follow, index-based investing strategy.
"I’m bullish. I like to buy things when they are out of favor. And I like to sell them when everybody is enthusiastic. Energy costs have already inflated the cost structure of companies and the costs for individuals. We also have a period where employment growth is starting to slow down. The long and short of it is that I think the Fed has to stop tightening before we get the rally. I don’t think the economy will look very good by the fourth quarter, and then the Fed will have to stop. So I like the stock market. I don’t care if it burps in the fourth quarter or the first quarter of next year. It’s a good long-term investment.
"When I look at the economy, I don’t think it matters too much what goes on. I think the economy is going to start down dramatically. I think that by the time we get into the next quarter year, interest are going to come back down, if not sooner, and long term interest rates are going to lead short term rate down, to the point where the Fed wills start easing, either at the end of this year or the beginning of next. I think that’s going to be the start of one of the biggest bull markets you’ve seen in an awful long time.
"If you put it all together, I feel like there is enough liquidity to run this economy. The only problem we have right now is a total lack of confidence. And that is going to continue to grow. CFO surveys have deteriorated. They are not optimistic. We will continue to see a lower level of confidence among consumers and investors. To me, that is the greatest environment to sustain a low-growth economy with low inflation and with low interest rates. That’s as simple as I can say it.
"As for specific investments, I’m a chicken. I take the most conservative route. I think index funds are the way to go for the average investor. The simple reason is that most people don’t have the time and probably don’t have the resources of a professional money manager to outperform the market. Therefore, I recommend that people invest "in the market’ through exchange traded funds. I’d note that ETFS are about 1.5% cheaper than buying the average mutual fund. The average ETF charges just 10 to 20 basis points, with no other charge. I believe very strongly that if you look at the performance of mutual funds, only 25% of them have beaten the market over a 10, 15, or 20 year period. So if you think you can beat the market, fine. But if you don’t, why stay up at night staring at the ceiling.
"I believe the S&P 500 SPDR (SPY ASE) should be the core of your holdings. I’d suggest that it should represent 40% of your portfolio. I would put another 30% of your portfolio in the technology area. I believe in tech for the simple reason that there are very few growth industries left in the world. I still believe that whether it is software or hardware or telecom, technology is a growth industry that will be with us for 5, 10, or 15 years. Who will be the specific winners? I don’t know. But I know that if I buy the Technology SPDR (XLK ASE), I’ll be holding some of the winners. An alterative would be the NASDAQ 100 Trust (QQQQ NASDAQ).
"For smaller position, I also like the healthcare area, simply because it has been so depressed. The pharmaceutical area might still be hiding some big surprises, and I don’t know which companies will be the survivors. But the Healthcare SPDR (XLV ASE) will survive, and includes companies in all facets of the healthcare industry. I’d also consider the Consumer Staples SPDR (XLP ASE). The reason for this holding is that I like to buy golf clubs in the fall in New England, because they are a lot cheaper than in the spring. Consumer non-durables have been in the tank for quite a period of time, and nobody likes the group."
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