What Is Your Time Horizon?

As a follow-up to my post earlier this week, I thought it would worthwhile to offer some insight and thoughts to the question “what I should do with my money?” Without knowing your personal financial situation, I offer the following point of view regarding what to do with your money in this fast changing, volatile world:

Time Horizon: 18 months or less

If you are investor looking to make money in the markets over the next 18 months, I believe it is going to be tough sledding. I could give you five reasons why stocks will do well over the next 18 months and five reasons why they will not do well.  What I am very confident in saying is that volatility will be ever present. It could be a bit of a rollercoaster ride for investors as the broad global issues will dominate the news and stocks will continue to trade on the recent headline or rumor. My three dominating macro thoughts for the markets over the next 18 months:

a.)    Global recession fears and European sovereign issues

Continued fears of the world economy attempting to avoid a recession will dominate the markets. Credit rating agencies still threaten downgrades for European nations as the European Union continues to struggle with their sovereign debt issues and the ripple effect it may cause. It amazes me how the global stock market trades so frequently on every European leaders meeting/summit/cough/sneeze/bathroom break. 

I believe that the world central banks, led by the European Central Bank (ECB) and the US Federal Reserve, will continue to provide the necessary liquidity (money) to avoid Europe going into a severe recession which would have broad global implications. 

Whether you agree with this move by the world central banks should not be your concern. The question should be how I structure my portfolio in this scenario. Some thoughts—any increase in liquidity and support for Europe will be seen as a short-term positive for stocks; positive for gold as it would move inversely to the large currencies that would decrease in value; negative for bonds and cash as money moves out and into stocks and other “risky” asset classes.

b.)    Political Changes

The 2012 U.S. elections and other worldwide elections should not be lost on an investor who is looking to make money in the short-term. Whether you are a Democrat or Republican, the impact of the elections and the markets' response will be direct. I have not a clue as to what the result will be but I do know that the current malaise and status quo out of Washington will be a negative on the markets both short and long-term. Broad economic policy changes need to be made to move the US (and global) economy forward. This is a discussion for a different time.

c.)     Iran

Iran and the increasing tension between them and the western world is the wildcard from here through 2012 (and may continue for some time). Action has already begun within Iran and their response and subsequent responses will determine how out of hand this gets. If we get into a larger full-scale war, all bets are off.  

Even rumors of an increase in tension can send oil prices higher which will lead to companies having to digest higher input prices that impact their bottom line. Global, political and social issues are always an outlier that can send the markets and economies in different directions. This is something interesting to watch for multiple reasons.

Although the expectations of a rollercoaster ride are prevalent, money can still be made even as bleak as the news might make things out to be. For the more astute investors, build in some defensive positions and hedge out your risk where appropriate (for example, buy individual Fortune 500 companies/stock and hedge with short positions on the S&P 500 – e.g.  TICKER: SH or VXX*). 

For those getting started, do not dump your lump sum of “investing money” right into the market. Perhaps holding some of it in cash over a 6-9 month time period is prudent.   One recommendation would be to dollar-cost average (DCA) into the market.  For a great, easy to understand explanation of DCA, I offer this definition.

Later this week (or next week), I will offer some thoughts as to investing longer-term which I think offer great opportunities and prospects if you can stomach the day-to-day, quarter-to-quarter and even year-to-year bumpiness.

*In the interest of full disclosure, I do own the VXX in my portfolio which is an exchanged traded fund that mirrors (not perfectly) the VIX index. The VIX is an index that measures market sentiment. As the VIX moves higher, the market is more worried and concerned. And the inverse is true. Both SH and VXX are proxies to hedge the stock market (S&P 500) but do not always move in lock step.  For instance, if the S&P 500 is up 1 percent, the SH and VXX may not be down 1 percent. Read before making a decision or consult your financial advisor.

All of my views above are just opinions and are not any representation of the views of my employer. Investing involves risk and you should research on your own or consultant your financial advisor before doing so.