That said, as Ben Graham suggests, it's also important to understand the macro picture to allocate what portion of your portfolio should be invested in equities, cash and bonds.
At this time, I believe a maximum cash position should be achieved despite whatever near-term relative performance lag this may create vs. the major indices. I hold 70%+ cash.
The other 30% is complicated. My largest position is a Japanese basket of net nets (10%) and DCIX (6%) which I described earlier. My intention is to increase DCIX (ideally at a cheaper price) after they announce the completion of a new debt facility.
Data Points To Consider:
- A sovereign European debt default can cause a crisis in confidence in U.S. money market funds (a study by Fitch suggested the top 5 money market funds in the U.S. have 30-40% of their assets in European bank debt). This would not be an issue if the European banks didn't also own a lot of European sovereign debt. While the precise figures are unknown, it's easy to imagine a quick flight to cash, markets crash.
- Which makes this even more difficult is the fact that the U.S. is also having trouble arranging a deal to raise the debt ceiling, creating the potential risk of a U.S. default. I ultimately think this will pass without a major shock to the system, but it's a low probability event that needs to be considered.
- China slows down. Not sure when, but it looks like it could be now. And if it is now, very few investors are worrying about it to the degree that they should. Chinese investor psychology has all the marks of a bubble. For example, Caterpillar (CAT) is expecting to increase their excavator production by hundred's of % in the next 3 years. Is China construction development really going to increase multi-fold in the next few years b/c it's unlikely CAT is going to be dramatically stealing market share? I'd bet against it.
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