Strategies for a Runaway Market (year-end edition)

As the Informed Investing Blog has become more popular during the course of 2013, it occurred to me that some of the very earliest posts were not widely read because the blog was unknown. With the year-end approaching, I couldn't help but update one of my posts from back in the spring, and re-publish it here. After all, it is even more relevant today, and back in May when it first appeared, my blog was landing on deaf ears (thanks to AdvsiorPerspectives, FA today and Linked In for that!).

It seems to me that the best advice for the upcoming year as an investor is "don't anticipate what will happen, just balance reward potential and risk potential for each client situation and be ready for anything." This is very similar to the feeling the surrounded markets in 1999 just before the dot-com bubble burst, and again in late 2007 when the credit crisis started to become more widespread. So, here is my advice for those investors and financial advisors who wish to start getting mentally ready for surviving 2014:

1. Don’t try to call market tops. While our key market indicators point to a frothy stock market, this does not mean a decline is imminent. Investing is not a black/white exercise. It is always some shade of gray. Don’t fall victim to the “I am getting in the market / out of the market” syndrome. That’s the mentality the media tries to push on us, and they are not fiduciaries (and thus are NOT obligated to act in your best interests).

2. Determine what level of volatility you are prepared to take on. It is easy to be growth-oriented during monster rallies, but the mirror image on the downside is daunting to any investor I know. This means their manager must have a plan to confront it whenever it occurs.

3. Use a flexible investing approach – incorporation of "inverse" securities to hedge a portion of a portfolio’s exposure to stocks can be a big advantage. And with interest rates threatening to move higher, one can also consider securities that hedge increases in U.S. Treasury Bond rates.

4. Practice proactive portfolio tax-management NOW.Taxable accounts likely have large gains that have not been "realized" (that is, the security has not been sold yet) this year, and/or gains that have been taken already – that’s better than a pile of losses, but it demands special attention nonetheless. Mutual fund investors are extremely vulnerable here since they have no control over when tax-related investment activity occurs.

From a tax standpoint, it may be best to hold on to as much of your stock market exposure as prudently possible, and add a higher than normal dose of inverse securities. Why? Because as long as the market goes noticeably higher OR lower as 2014 begins, something will be up and something will be down – which allows us to take some tax losses before year-end, while maintaining the level of balance we target in each strategy we manage.

As the venerable cop on the old TV drama Hill Street Blues said to his precinct each morning before sending them off to their assignments…"hey, be careful out there."

© Sungarden Investment Research

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