Just a quick "thank you" to Elizabeth and Tad -- you've given me much
food for thought and I sincerely appreciate it.

Nobody wrote:
- quote -

What ALWAYS worries people are the stocks!

In international, do you include small, value, and emerging markets?
Some of the studies suggest those are better diversifyers than
large-caps. Generally these all outperformed the US market last year,
showing the value of diversifying overseas (finally! for some of these
it's taken years...). Those concerned with job flow outside of the US
might consider these as offsetting investments.

- quote -

By definition a true hedge reduces both losses and gains, so it might
not be what you're after.

You could diversify more, but it sounds like you may have diversified as
much as feasible without adding oddities like gold or timber or pork
bellies.

You could change your allocations...70/30 might just be too risky for
you. Cash dampens out the volatility; value stocks add risk but could
reduce losses that occur due to an overpriced market. Arguably any mix
that has you revisiting things based on short-term news might be too
risky. Current stock valuation vs. GDP, economic policies that probably
won't be in place even a few years from now, insider selling...this
isn't exactly long-term stuff. The fact it concerns you suggests 70/30
isn't right, at least for a pure asset-allocation kind of strategy
(which asks you to sit idly by despite the alarm bells - rebalancing
periodically, but little more).

You could also give up a pure asset-allocation strategy, if that was
ever even what you'd planned. Perhaps base your allocations on the
relative valuations of the asset classes - there are dozens of these
kinds of models. Keep in mind that when doing so you're introducing
another risk element, "manager risk" (you're the manager). The fancy
term for the technique is "tactical asset allocation" aka market timing.
Much has been written about that...as I'm sure you know, the risk is
that you'll sit on the sidelines at the wrong time.

One comment: I hear so often people saying "I'm a long-term investor
but..." followed by considerations that span months or perhaps a couple
of years. For truly long-term goals the expected levels of these
different investments 15 years from now should be more of a concern than
their relative valuations now, or 15 weeks from now. You can always find
bearish signals but it would be unusual to say "this investment won't do
much for me in the next 15 years." My personal view is that long-term
bonds qualify for that kind of scorn, but everything else is solidly in
the grey area.

Sure, lots of the alternatives look expensive. But arguably when
everything looks overpriced it's a crap shoot to pull your money out of
any of them.

Of course if you really feel the Big Drop coming on, cash is king. And
if you're correct, a career in money management awaits!

-Tad

"Nobody" <no-email[at]nospam.com> wrote in message
news:no-email-19072C.08394223022004[at]news-central.ash.giganews.com...
- quote -

I guess I don't see things the same way. Some of those historical returns
included tax policies where ONLY the rich paid income taxes (1% for those
whose incomes were over $20K, 2% for incomes above $100k). I also recall
that in the 1950s the tax rate for the extremely wealthy was 91%. I would
call either of those tax policies reckless, yet we don't seem to have a
problem with stock market returns in those "good old days." There were
deficits back then, too, and you are correct that they were smaller.
Smaller, too, was the amount of money the federal budget pumped back into
the economy. For instance, in the "good old days" there was no federal money
for education, no Medicare, social security stopped when the dependent child
turned 18, no revenue sharing with state/local governments, to name a few
that come quickly to mind. Maybe you'd like to go back to those times, but I
think you'd have a hard time getting consensus on which federal programs
should be cut entirely.

When you choose another asset allocation in order to reduce your risk, it is
almost 100% that you will also reduce your returns over the long-term.
Remember High Risk/High Reward? The reverse is also true: Low Risk/Low
Reward. Only you can choose where your risk tolerance will balance these
strategies. If you are truly interested in preserving principle, rather than
growing your nest egg, you will put it in CDs or a Money Market account. I
believe everything else has some measure of risk associated with it. But
while you're looking at that scenario, remember the risk of declining
purchasing power. This may be a greater risk as it is also quite likely
you'll see a more volatile inflation rate throughout your lifetime.

Elizabeth Richardson

In article
<m%o_b.34334$aH3.1076271[at]bgtnsc04-news.ops.worldnet.att.net> ,
"Elizabeth Richardson" <erichktn[at]worldnet.att.net> wrote:

- quote -

I guess that is what I'm saying. I arrived at the 70/30 mix based on an
examination of the historical risk/return associated with that
allocation. But those risk/return numbers were based on economic
conditions that differ quite a bit from today's situation --
unprecedented deficit spending, reckless tax policies, offshoring of
jobs in all sectors. It is, in short and in my opinion, a "new economy"
but not in the positive sense of the dot-com era.

But, I do not have a crystal ball, and putting everything under the
mattress is clearly a losing strategy.

It would seem that this leaves me with the option to (1) reduce equities
(in favor of what? REITs are overbought and due for a correction; bond
funds will suffer losses in NAV when [not if] interest rates go up);
(2) increase international exposure -- someone out there is making money
from all the outsourcing. Unfortunately the weakening dollar makes
international equities more expensive. And there is the little matter
of risk due to political instability.

Any suggestions for alternatives to cash? Do folks here advocate buying
bonds outright to preserve principal? I'm reluctant to go that route as
I am a small-fry investor and so will get clobbered by trading costs.
Or are ultra-short bond funds a reasonable way to take up a position on
the sidelines?

"Nobody" <no-email[at]nospam.com> wrote in message
news:no-email-69A96D.22053022022004[at]news-central.ash.giganews.com...
- quote -

Based on your reading, are you saying that your risk tolerance is changing?
If so, then you need to change your allocation to some lesser percentage in
equities. It would appear that you have already diversified greatly.

Elizabeth Richardson

Can anyone suggest strategies for hedging my domestic stock positions?
I invest exclusively in mutual funds (Vanguard, TIAA-CREF). From a risk
tolerance standpoint, my target allocation is 70% equity / 30% bonds. I
also ladder CDs and use a money market for my emergency fund.

For bonds, I have stayed with short duration funds (vanguard short term
corporate) and TIPS, as I believe that interest rate hikes and inflation
are both likely near term risks.

What worries me at this point are stocks. I am diversified across
market sectors and capitalizations, and I have a substantial
international position for diversification purposes too.

I see, however, that Vanguard published a chart that shows how equity
valuations are climbing well outside of the historical mean as a
percentage of GDP.
(http://flagship2.vanguard.com/VGApp/...nguardviews/js
p/VanViewsNCArticlePublic.jsp?chunk=/freshness/News_and_Views/news_ALL_ot
ccp_02182004_PB_CO_AO.html)

This looks like a strong bearish indicator.

Also, I read that insider selling in the domestic stock market is at a
high point, another bearish indicator.

Finally, Bush's economic policies do not give me great confidence. The
deficit spending is reckless, the level of stimulus is unprecedented.
In short, I believe that something's got to give in the next year.

Given all of this, are there hedging options for us little guys? Or is
fleeing to cash the only option? I should add that I don't expect to
need the funds invested for > 10 years; however, that doesn't mean that I
feel comfortable sitting idly by while the alarm bells are ringing.