Crisis? What Crisis?

Democrat and Republican leaders in the US failed to reach an agreement this weekend on raising the US’ debt ceiling. Markets around the world fell today on this news. The media are getting pretty excited about this issue, but is at really a big deal? Sure, the US defaulting on its debt would be novel, but would it really matter? The US can afford to pay its debts – failure to do so it a political issue, not a financial issue. So, with the exception of actual US Treasury bond holders, should anyone care?

I moved more heavily into bonds on 13th June. For a time this offered excellent protection against a drop in the stock markets, but it also means that I have failed to participate fully in the recent rally (see chart below).

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I currently have 41% of my portfolio in bonds, 6.5% in gold, 0.5% in cash, and 52% in stocks. I have been looking for the right time to increase the stock holdings back to the 75% level. Given the risk to bonds (real or imagined) now is the time. I will reduce my bond holdings to 19%, keep the gold and cash at current levels, and increase stocks to 74%.

  • SELL Bond Fund @ $205.48
  • BUY S&P Fund @ $103.03

POSTMORTEM

One month after these trades, on 25th August 2011, they look like a bad call. The S&P fund is down 12% while the bond fund is up 2%. I made a classic investing error here: after missing a rally, I tried to chase it and ran into a major pullback. I also deviated from my Investing Policy, which states that I will hold a minimum of 25% in bonds regardless of market conditions.

The lesson here is to stick to my Investment Policy at all times and never try to chase momentum. I will set my bond holdings to 30% of total holdings and leave it there.

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