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