Monday, February 17, 2014



The Proper Cause for Optimism

To the extent that we are concerned and defensive about the prospect for steep equity market losses over the completion of this market cycle, we are also encouraged and optimistic about the prospect for strong investment opportunities that we expect to emerge as a result. Similar optimism for improved investment opportunities was certainly vindicated following periods that shared features like the present – 1929, 1972-73, 1987, 2000 and 2007, not to mention many less extreme instances of overvalued, overbought, overbullish conditions.

We currently estimate prospective nominal total returns for the S&P 500 of just 2.4% annually over the coming decade. With the 10-year Treasury yield at 2.8% and short-term yields expected to remain depressed for years, we expect the 10-year return from an equally-weighted portfolio of stocks, bonds, and cash to average only about 2% annually from current prices. Our optimism that better opportunities will emerge over the completion of the present market cycle is unbowed. That optimism demands that investors refuse to lock-in the prospect of dismal long-term returns, or surrender in the face of a deafening speculative refrain that has lured others into the abyss throughout history.

Meanwhile, we remain encouraged. Those who follow a historically-informed, value-conscious, and risk-managed investment discipline should be among the most optimistic investors in the financial markets. It’s just that this optimism is about future opportunities rather than present ones.
DYI Comments:  The Great Wait continues with optimism that future values will present themselves delivering higher returns.  For the real [not closet speculator] long term investor this is a "blink of eye" in time.  When the market corrects DYI's sentiment indicators will improve as the crowd losses its optimistic tone and is replaced by a pessimistic one.  In other words a bear market has arrived for the value players to scoop up excellent values along with higher future returns.

Market Sentiment

Smart Money buys aggressively!
Capitulation
Despondency--Short Term Bonds
Max-Pessimism *Market Bottoms*MMF
Depression
Hope
Relief *Market returns to Mean* 

Smart Money buys the Dips!
Optimism
Media Attention--Gold
Enthusiasm

Smart Money - Sells the Rallies!
Thrill
Greed
Delusional---Long Term Bonds
Max-Optimism *Market Tops*--REITs
Denial of Problem--U.S. Stocks
Anxiety
Fear
Desperation

Smart Money Buys Aggressively!
Capitulation

The only reason that stocks are one notch below max-optimism for this is a secular chart not cyclical.  The top spot of max-optimism was reserved for the year 2000 the secular top for stocks.  When will stocks bottom out on a secular basis?  I have no idea time wise but DYI will know when we have arrived for the crowd will be so pessimistic stocks will no longer be held in disdain as they will simply be ignored as an asset category.  When that day arrives don't be surprised that the estimated 10yr average annual returns are north of 15% and possible 20%.

DYI


AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 02/1/14

Active Allocation Bands 10% to 60%
45% - Cash -Short Term Bond Index - VGPMX
25% -Gold- Precious Metals & Mining - VBIRX
20% -Lt. Bonds- Long Term Bond Index - VBLTX
10% -Stocks- Equity Income Fund - VEIPX
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