Ultra-Bearish Investing Advice

How to Follow Marc Faber’s “Ultra-Bearish” Investing Advice

Wednesday, January 30, 2013 8:30 AM

“Every generation throws a hero up the pop charts.”

But for the purpose of this article, I would change these famous Paul Simon words slightly to “Every market cycle throws an investment guru up the press charts.”

And the pontificator du jour is Swiss economist Marc Faber, a lifelong investment contrarian who is also known by the moniker “Dr. Doom.”

Faber is most famous for warning his readers to dump their stock holdings prior to the market crash of 1987. He also predicted the bull market for oil, precious metal, commodities and emerging markets — particularly China — in 2002. In 2009, he predicted the U.S. stock market bottom, and was right in his predictions for 2011/2012. In addition, his prediction that the Federal Reserve would step in with unlimited quantitative-easing programs has come to pass.

It’s no wonder Faber has earned quite the reputation for being an accurate market predictor.

So what does Dr. Doom say about 2013?

He is convinced investors are way too optimistic about the U.S. economy for 2013. Here are his words from his “Gloom, Doom & Boom” monthly report:

“That something is not quite right with the economy is evident from the recent performance of Wal-Mart, Tiffany, Genesco, and Kohl’s. What disturbs me about most asset markets is that we had outsized gains since early 2009 (there are exceptions such as Vietnamese, Chinese, Japanese, and European equities, and also U.S. housing).

In my opinion, investors’ expectations about future returns on their assets are far too optimistic. In a world that currently hardly grows, investors will need to reduce their future return expectations. I believe 2013 will not be a favourable year for holders of assets. My priority has now shifted to the preservation of the outsized gains I have achieved over the last three years.” 

He cites a breakdown in the technical picture of the U.S. market and 2012’s huge bounce from the lows as reasons for his bearish proclamation.

 

If investors still want to own stocks, then he recommends Vietnamese, Chinese and Japanese.

And despite referring to himself as the “most bearish person on Earth” during Barron’s eighth annual “Art of Successful Investing” conference, he suggested a diversified portfolio to weather 2013.

 

His exact recommendation: Diversify your portfolio into four segments.

These segments are 25% in equities, 25% in precious metals, 25% in cash and bonds, and 25% in real estate. Faber said he doesn’t expect any of these asset classes to increase substantially this year, but they are likely to preserve your wealth.

And because there’s no information available about Dr. Doom’s portfolio holdings, the next best thing is to design a proxy portfolio based on his recommendations.

So I built a portfolio based on his “25-25-25-25” allocations. And since the main point is to “diversify,” I think exchange-traded funds (ETFs) is the best route to take so single-stock risk is minimized.

 25% stock allocation
Because Faber clearly does not like the U.S. stock market at the current levels, and leans toward Japanese, Chinese or Vietnamese stocks, an equal allocation to ETFs that track their respective markets should fit his recommendation.

The iShares MSCI Japan Index ETF (NYSE: EWJ), the Market Vectors Vietnam ETF (NYSE: VNM) and PowerShares Golden Dragon ETF (NYSE: PGJ) are my favorites in this category.

25% in precious metals
The SPDR Gold Trust (NYSE: GLD) is a good fit for this segment of Faber’s proxy portfolio. This ETF replicates the performance and price of the gold bullion.

25% in cash and bonds
Sticking with his words to the letter, an equal allocation to cash and bonds make sense. I like Vanguard’s Total Bond Market Index Fund (VBMFX) to mimic the broad bond market.

25% real estate
The Schwab U.S. REIT ETF (NYSE: SCHH) provides deep and wide exposure the U.S. real estate market fulfilling this segment of Dr. Doom’s 2013 proxy portfolio.

Risks to Consider: While I can find little fault with Faber’s diversification recommendations, no matter how accurate a market guru has been in the past, there’s no telling when a major mistake will occur. Should the U.S. stock market continue higher on its current bullish path, then Faber’s followers will miss out on profiting from the strong bull market already underway. 

Action to Take — > Although I see the U.S. stock market continuing higher for at least the first half of 2013, Faber’s 25-25-25-25 suggestions for a diversified portfolio make sense if your intention is merely to preserve wealth.

 

 

Advertisements

I will connect with you soon

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s