An Ark, a Speedboat, a Tight Bathing Suit

Famous investor, Warren Buffett is credited with the following quote, “You never know who’s swimming naked until the tide goes out.”



China, Japan, and Europe are cannonballing into high tides with new stimulus announcements. Downward global GDP growth and lower price pressures are clear on the horizon, even as metrics ebb and flow. At the same time, the U.S. central bank has indicated an end to one element of its monumental wave of Quantitative Easing (QE).

My Asset Allocation Strategy

Ark: This core and stable vessel is built to last, to withstand storms, to leave mostly untweaked in times of stress–emotional or market related. This majority of my portfolio should be untethered to a reliance on any one central bank, one asset class, one direction of interest-rates, or my ability to outguess new bulls or bear markets. This is not to say that significant shifts in underlying investments simply stay put forever or that damage will not occur.  More importantly, this reliable piece of my asset allocation remains steadfast in its character traits.

Speedboat: This satellite and more aggressive watercraft is built for quick maneuvers, possibly fun and entertaining, and an opportunity to impress myself (or teach humility). This smaller allocation should demonstrate my most active portfolio management, style, and security selection skills. Rockin’ and Rollin’, these investments better take advantage of great ideas, dislocated markets, and short-term behavioral mistakes made by my fellow investors. These vehicles provide an opportunity to earn much greater returns than those generated by the more passive portion of the portfolio.

Tight Bathing Suit: I wholeheartedly pay attention to risk management. Famous investor, Warren Buffett is credited with the following quote, “You never know who’s swimming naked until the tide goes out.” A rising tide of asset prices like we have lived through since 2009 can make a lot of people and investments appear intelligent. Over my twenty-year career, many of my most important lessons occurred when I realized just how dumb I could be. More importantly, with so many boats lifted in the high tides, consumers of financial advice and even Do-It-Yourselfers may miss indiscretions, poor advice, lack of stewardship, and inferior tools and techniques. You worked hard to build wealth so avoid getting caught showing your assets at the wrong time!

Central-Bank activity, global interest-rates and currencies are interconnected with your portfolio and retirement goals!

The European Central Bank (ECB), led by Mario Draghi, holds its next monetary-policy meeting January 22nd of next year with high anticipation for its own bond buying QE program. Somewhere in the vicinity of a 2% sustained pace is the goal-line target for official inflation measures. Germany is close to 1% price increases, however, the rest of the Eurozone is struggling at 0.3% in November as energy prices fell. Source: Eurostat. Data prior to 1996 are estimated on the basis of non-harmonised national Consumer Price Indices (CPIs).

Stage 3 graph

The Federal Open Market Committee (FOMC), led by Janet Yellen, concludes its next monetary-policy meeting December 17th with high anticipation for the associated Summary of Economic Projections release and press conference. Yellen has clearly reiterated that the timing and path of the target federal funds rate is data-dependent. Financial market reactions and preemptive interpretations by systemically important financial institutions will be important inputs.

Sales at the holidays are good, right?

Like most things in life, balance and stability are the keys to success. Central banks attempt to stop severe deflation (price drops), along with severe inflation (price increases), in an attempt to keep the excessive volatility in prices to a minimum.

Deflation is in almost all cases a side effect of a collapse of aggregate demand – a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. -Dr. Bernanke

Deflation is viewed as the greater and less “controllable” threat, and it can be caused by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to economic depression. For example, Eurozone headline unemployment stands at 11.5%.

U.S. asset investors have benefitted greatly from the reflation of stock and bond prices. The FOMC leads an interesting experiment on how to safely exit the high tide environment of unusually accommodative or even emergency-like monetary-policy. U.S. growth, prices, and employment are thought to be stable. China, Japan, and the Eurozone are not in exit mode. In fact, Japanese Prime Minister Shinzo Abe’s ruling party may claim a fresh mandate for his economic revival policies as his coalition is projected for victory in recent elections; after all, the Japanese stock market (Nikkei) is at 7-1/2 year highs.

Thoroughly review all your taxable and tax-deferred accounts. Make sure you and the advisors who work on your family’s behalf have coordinated strategic (long-term) and tactical (short-term) estate, asset allocation, and margin-of-safety plans. The tides will inevitably change so do not wait to hear the thunder before the next big storm!

Please visit my October 29th piece on the U.S. central bank’s policy dilemma and scroll to the conclusion for an investor checklist of more controllable factors, ex. Take charge of the collaboration amongst your tax, legal, and business advisors to maximize your family’s financial, tax, and investment planning–do not assume this is taking place without your encouragement


I welcome your comments.

Michael embodies client-stewardship in all his work and happens to be a passionate expert in securities analysis, asset allocation, economic analysis, and wealth management solutions.

Email: & Twitter: @MichaelHakerem