April 24, 2011: Portfolio Gridlock, Diagnosis and Treatment

The word "gridlock" has several peripheral definitions. Perhaps the best definition for this post is from Webster's New World Dictionary which defines gridlock as "a complete lack of movement or progress resulting in a backup or stagnation; any obstructed condition or impasse".

Does this condition exist in your investment world? If the answer is yes, rest assured you are not alone. I have floated the investment gridlock condition to disparate individual investors over the past month. The admittedly unscientific result appears to indicated that investment gridlock is not uncommon.

I speculate that investment gridlock occurs when too many investment choices are accompanied by a gut feeling that the world is changing, with our(United States) government out of control both at home and abroad. Is "the full faith and credit of the United States" meaningless? Do adversaries - economic and other - view us as weak? Have we traveled a bridge too far trying to police the world and thrown good billions after bad trillions to many nations who show no gratitude? Are we overwhelmed by thousands of investment choices and financial articles so as to throw the best fundamental portfolio intentions into a quagmire? In short, investment gridlock may be a symptom of fear from all of the above.

A typical response I received from investors experiencing portfolio gridlock is not in the construction or allocation into the initial portfolio itself. It occurs when funds piling up in cash or cash equivalents await investment. The trigger to allocate these funds is not pulled because of the fear factor of our present investment and geo-political world. Gold? Already $1500. Silver? North of $40 - is this a bubble?? Foreign stocks? Europe, practically bankrupt. Asia? Inflation, China, war and peace.South America? How many more Chavez's are there to bring that continent back to the days of Juan Peron? Energy? Sector stocks are one tsunami or blown oil rig away from a stock collapse. Alternative energy? With no government subsidy, no profits. U.S. stocks? What if the taxing idea on soaking the investing class actually becomes law - and once it starts, when will it end? Bonds? Commodities? Currencies? Wealth Confiscation?

Mutual Funds, Exchange Traded Funds and the like will spread out risk. But will they withstand global recessions and major armed conflicts? The German stock market was hot in the 1930s. The Russian stock market was hot in the early 20th century.Japan? The place to invest in the 1970s - they were poised to own the world. We know how that ended.

All risk cannot be mitigated. Serious global conflicts, including cyber warfare which would likely compromise and/or destroy all electronically stored financial records along with your internet brokerage will create mayhem. Reality check: one U.S. Air Force facility in Colorado fends off over 15,000 cyber intrusions per day (thank you,China).

No wonder personal variations on the portfolio gridlock theme abound!

How does one treat this condition?

My assessment is to simply keep within your comfort zone with a diversified portfolio.A three-legged stool concept works well for most investors as it promotes both discipline and clarity. Balancing a Permanent Portfolio using ETF's for assets you cherish could include gold (iShares Comex Gold Trust,IAU), Swiss Franc exposure (Currency Shares Swiss Franc Trust,FXF;iShares MSCI Switzerland Index, EWL), Singapore "the Switzerland of Asia" (iShares MSCI Singapore Index, EWS), US and International stock ETFs, REITS foreign and domestic (Vanguard Domestic REIT,VNQ;iShares Developed World Real Estate ex-US,IFGL; Vanguard Dividend Appreciation,VIG; Vanguard Energy,VDE;iShares Morningstar Small Company Growth Index JKK; Schwab Emerging Market Equity,SCHE),a small percentage in U.S. bonds (Vanguard Total Bond Market, BND;Vanguard Intermediate Term Government Bond, VGIT; iShares Barclays Inflation Protected U.S. Securities, TIP), and a commodity ETF (Power Shares DB Commodity Index Tracking Trust, DBC). I would encourage an Income Portfolio consisting of foreign and domestic TIPS, short term bonds and selected preferred securities that have inflation protection features (such as Aegon NV, AEB;Metropolitan Life preferred A, METpA and Deutsche Bank Contingent Capital Trust II,DXB). The final leg of the stool is the Speculative Portfolio, which should be limited to no more than 15% of you total securities funding. This portfolio is where you place bets based upon informed hunches such as the PowerShares ultra long/short ETFs, or to store cash waiting for a compelling buying opportunity. You may find a better product mix that accomplishes an effective result for each of the three portfolios.

Don't vary from your portfolio strategy of sensible allocation. Keep a paper trail of all transactions. Make peace with yourself,as you are executing a prudent investment scheme even when the world around you seems to be falling apart. And maintain a sense of humor - after all, in the long term we're all dead.