Makin' Money

Tilt to safety

Chris Farrell Dec 5, 2011

What do you think will happen? The Euro could collapse — or not. (The owner of the wine store I frequent is adamant that the Euro will disappear; I don’t think so. It’s a running argument.) Standard & Poor’s might downgrade Germany and the five other Triple-A Eurozone countries and the U.S. could sink into recession — or not. 

I keep reading that the lesson of the past few years — including the recent unsettling turmoil — is to throw out the old rules of investing. I don’t buy it. My reaction is the exact opposite. The old rules of investing were hammered out over previous bear markets, such as the Great Depression of the 1930s and the Great Stagnation of the 1970s. They still work. Take a look at this chart from on the four big bear markets.

The market proverbs that preach diversification, dollar-cost averaging, rebalancing your portfolio as you age, investing prudently to limit downside risk and keeping fees low are still sound ideas. I would still forget trying to time and beat the market. It’s hazardous to your wealth and your mental health. Focus instead on what you’re trying to accomplish and tailor your investment strategy to the timing of those life goals. For example: a home in a couple of years, paying the college tuition bill in 6 years, and retiring in 20 years. (Recently, I’ve been getting an email about how it’s time to bury the old buy-and-hold rule and instead embrace day-trading in a 401(k). C’mon!) 

In thinking about the markets and investing, I’ve learned a lot over the years from Jeremy Grantham. He’s the chief investment strategist at the money management firm GMO. A legendary, courtly value investor, he’s savvy about long-term trends and, at the same time, often early in his judgment calls for the typical Wall Street money manager. His newsletters are wide-ranging. The latest is The Shortest Quarterly Letter Ever. 

Short, yes. But it covers a lot of ground. For instance, Grantham is deeply worried about income inequality in the U.S. A wide income gap between the top 1 percent and the remaining 99 percent leads to weaker, more erratic economic growth. “We have gone from having been notably upwardly mobile during the Eisenhower era to having fallen behind other developed counties today, even the U.K.!” he writes.

Grantham advocates embracing quality stocks, tilting toward safety and owning large cash reserves despite miserly yields. (He is bullish long-term about commodities. Short-term prices are likely to go lower, however — a combination of less bad weather and global weakness.) Seems like a prudent approach to me.

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