by David Merkel, Aleph Blog
A letter from a reader:
Hi David,
What would you recommend for a long only equities portfolio?
I too think the market may be overheating, but as always, itâs impossible to tell when the party will end. I would have said the same thing last year this time as well.
This is what I am doing now:
- Cash is presently 16% of my portfolio. I let that fluctuate between 0-20%. I try to be fully invested during crises, and build up some cash when valuations are extended.  16% means valuations are high, but they could get higher â we arenât at nosebleed levels.
- I have more invested in foreign companies than I normally do. Around 40% of the portfolio is in foreign companies, which are at present undervalued relative to similar US companies.
- Emphasize companies with strong balance sheets, in industries that will not go away.
- I own cheap stocks. The median valuation of the stocks that I own is around 10x earnings, and 1x Net Worth (Book Value).
This isnât sexy, and if the market roars ahead, my clients and I will underperform. But if there is a reason that emerges that causes the market to fall, my clients and I will do better than most.
I take more risk when the market is in the tank, and less when everyone thinks things are great. Â This is particularly true when policymakers like the Fed are triumphant over high valuations, and low yield spreads.
This is a time to take less risk, in my opinion, but not a time to take no risk.
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