This is a question I get often. As a long-term investor, I believe the time for Socially Responsible Investing is now…right NOW. Long-term investors are not concerned over the current level of the stock market and whether the Market’s going to rise or fall the next day.
I propose investors be “fully invested” in equities most of the time. Being “fully-invested” is different for different people depending on age, risk tolerance, etc. As a Heuristic, I suggest being 75% long equities as a “base-case” level. The remainder would be invested in bonds, real-estate, hard assets, and alternative/exotic investments (e.g., natural gas, platinum, rare-earth anyone?).
With that being said, there are certain times that are better to invest in the market. Rather than choosing tops and bottoms based on certain fundamental criteria (e.g. price to earnings ratio), I have developed two Market Timing Indicators. These indicators help me maintain objectivity with regards to my investment positions, as I have no influence on them. They were designed during late 1992 and have been updated weekly since.
The two major indicators are:
1. Sentiment: based on human behavior, and supported by theories backed by Behavioral Finance.
2. Technical: which measures market breadth, or underlying strength in the broad market.
These indicators are used to obtain my Portfolio's Investment Position. Note, they do not know, or represent market levels. They are measures of perceived risk, especially the Sentiment Indicators. I have often taken mental notes of how everyone seems to clamor to buy things when their expected rate of returns are minimal compared to their inherent risks. Would you like a current day example? Just take a look at the bubbling Corporate Bond market. Companies like IBM, and Microsoft are borrowing at historically low rates, which are just a tad above Treasury rates.
This website will include three simple colored (traffic) signals. Green for “Buy” (i.e, low-risk levels) which means allocate your portfolio to a fully-invested equity position. For me, that’s about 75-80% invested, but it could be lower for a more-risk adverse, or retired individual. Yellow, means caution, risk levels rising. Red means “High-Risk”; investors should reduce their investment positions to conservative levels perhaps 30-40% equity. The remainder could be in treasuries, gold, high-grade corporate bonds, etc.
What are the Indicators saying now? My Indicators are now flashing “Yellow” making a case for rising risks. The market could continue climbing under the “Yellow” signal; however, it's more susceptible to sudden downward moves.
Feel free to contact me for additional clarity or to answer other questions.
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