Glassman’s redemption: Find an investment safety net

February 21, 2011

James Glassman is seen in this American Enterprise Institute undated handout photo released December 11, 2007.  REUTERS/AEI/Handout It’s hard to climb out of an abyss in which you’ve predicted that the Dow Jones Industrial Average would hit 36,000 — only to see it crash twice and get pinned to the mat for years. James Glassman was one of the many bubbly U.S. stock cheerleaders who recommended stocks for the long term at the wrong time.

As most any stock investor will tell you, the last decade for U.S. stocks has been pretty dismal with the dot-com bust, 9/11 and the 2008 meltdown buffeting investors at every turn.

Yet Glassman has made an effort to redeem himself with his latest book Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence.

Co-authored with Kevin Hassett of Dow 36,000 at the height of the tech-lemming era, I would have thought that Glassman would have laid low in a bunker with gold, U.S. Treasury Bonds and canned goods for while. It seems that Glassman has seen the light, though, and is preaching some sound advice for a more tumultuous time.

“Yes, stocks bounced up and down,” Glassman writes of his former views on stocks, “but your job as an investor was to hang on and collect your reward for perseverance at the end. I advocated the same strategy of heavy and diversified U.S. equity holdings that most sensible advisors espoused — but with an extra dollop of optimism. And I was wrong.”

So what happened to U.S. stocks for the long run? Not a good idea in the wake of the worst 10-year period of the stock market when accounting for inflation (through 2009), Glassman notes. Now it’s time for a “margin of safety.”

While this strategy would have been great advice more than a decade ago, Glassman’s new religion is asset protection (mine, too, although for me it’s an old faith). Ironically enough, Glassman had to reach back to legendary value investor Ben Graham (and mentor of Warren Buffett) to arrive at his new safety mantra.

Glassman’s safe harbor strategy is designed to “protect you against the Category 5 hurricanes of the financial kind.” Forget about living long enough to bounce back from stock market losses. “The older you get, the less long term is left for recovery.”

In practice, Glassman advises cutting back on U.S. stocks, investing in “aspiring” markets (Brazil, China and India) and investing in bonds. Even more cautious these days, Glassman also recommends something a little exotic for most mainstream investors: a genuine hedging strategy. Here’s the skinny on that:

  • Buy derivatives to protect against stock losses. You can do this through put options on stock you own or hedge the entire market. These vehicles rise in value if the market drops. There are also inverse exchange-traded funds “bear market” exchange-traded funds that do the same thing, only less precisely.
  • Protect against inflation. That means boring Treasury Inflation-Protected Securities. Staples in my portfolio, unlike conventional bonds, TIPS climb in value when the Consumer Price Index rises.
  • Find a safe level of stocks, bonds, currencies and hedges for your age and lifestyle and re-balance every year. Sound advice, but nothing new.

The one odd shortcoming in Glassman’s book is that he “has no place for commodities.” With inflation coming back and global demand for everything from aluminum to zinc exploding, I find this statement troubling.

I would recommend having a small portion of your portfolio (less than 15 percent) in a commodities fund like the PowerShares DB Index Tracking Fund, which holds a basket of key commodities.

Is it time to absolve Glassman for his irrational exuberance more than a decade ago? After all, he was steering a lot of investors into a maelstrom. If your road to redemption includes a generous dose of principal protection in these volatile times, a lot can be forgiven, although nothing is forgotten.


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