Author James Glassman’s Surprising Advice for Investment Success: The Weekend Interview

Short the U.S. economy, buy derivatives and reallocate to bonds? We better let him explain

James K. Glassman has been writing about investing for almost 40 years. Sometimes he’s spot on (as a former columnist for the Washington Post) and sometimes not (when he wrote Dow 36,000). But we’ll forgive him, if for no other reason than he stood up to Lou Dobbs' outsourcing demagoguery in a 2004 interview on “Lou Dobbs Tonight” in what the Washington Postcalled a “strikingly personal debate.” Glassman called Dobbs a hypocrite; Dobbs called Glassman a “dim light.”

Glassman (left) was Undersecretary of State for Public Diplomacy and Public Affairs under President George W. Bush and is currently executive director of the George W. Bush Institute, the public policy think tank associated with the presidential library. His latest book is Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence.

Q: What is the one take-away from your book you’d like readers to have when it comes to de-risking their portfolio?

A: These are very turbulent and dangerous times for their investments, but they have to stay in the market. So the key for them is to accept the fact they’ll have to give up some performance on the upside to protect on the downside. If they invested in an all-stock portfolio in 2007 that followed the straight S&P 500 index, they’d have been up about 33%. In 2008, they’d have lost three-eighths, or about 37%, of their portfolio. With what I advise, if they were to go through the same period, they’d have had about a 25% return on the upside, and would have lost only about 10% when the crisis hit.  It makes for a much smoother ride.

Q:  Bloomberg recently reported stocks in developed countries are rising the most since 1998 while emerging markets slump, a sign of what it calls “the United States returning to its role as the engine of world growth.” But you recommend investors hedge against decline by owning bear funds that short the U.S. economy. Why?

A: The United States is no longer the center of the economic universe. Aspiring nations are driving the global economy, growing, in a normal year, about four times as fast as mature nations. That said, I obviously don’t recommend you completely hedge against the U.S. A bear fund in the portfolio makes sense. And an allocation to emerging markets should be more than 6%, 8% or 10%; more like 10% to 20%, a big part.

Q: You also recommend reducing equity exposure and moving to a heavy allocation to bonds. Are you at all concerned about the so-called bond bubble?

A: No, because what I recommend has a very low exposure to interest rate risk. I recommend you don’t go too far out on the curve and use a laddered strategy so you

always have something maturing and the opportunity to buy into more favorable environments. In this case, a bond strategy should be an income strategy, not an investment strategy.

Q: You like derivatives, but with all the negative press they’ve recently received, will your recommendation resonate with the average investor?

A: A derivative strategy doesn’t have to be complicated. A simple derivative can be something like an inverse or bear fund. You can also sell covered-calls and buy puts. Most investors hedge on their house and in other areas, but have been long the U.S. economy for most their lives. This is simple way for them to hedge financially that doesn’t cost much.

Q: One of your previous books is provocatively titled Dow 36,000. Any second thoughts?

A: Yes, it’s a provocative title, one in which I had to be humbled by after everything that happened. But the book itself actually makes a reasoned case about investing and economic growth. One of my colleagues at the American Enterprise Institute told me never to tie the Dow to a specific date. I wish I had gotten the advice sooner. But the new book recognizes the world has changed. The U.S is no longer the end-all, be-all economy, and I believe the shock of the last 10 years will happen much more frequently. After what we’ve been through economically, I have a lot more empathy and appreciation for the anxieties and behavior of investors, which is why I wrote the book.

Q: What does your new role with George W. Bush Institute entail?

A: I’m the executive director of the institute and I’m in the process of hiring the research fellows. We’re focused on four areas; education reform, global health, human freedom and economic prosperity. So it’s an extension of the president’s focus during his administration. The institute is part of the presidential library and it’s located on the campus of Southern Methodist University. We’re different from other think tanks in that we’ll have measurable goals. Most think tanks write policy papers in the hopes they’ll have some influence. But we want to measure that to ensure we’re effective.

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