COUNTERCOLUMN: All Your Bias Are Belong to Us

Lost 16 percent in after hours trading today.

Damn. I was just talking to someone about shorting it a week ago tuesday! Someone in my family owns it long, and asked me what I thought of it. I told him I hadn't looked at fundamentals, but it smelled screamingly overhyped to me. Like something I hadn't seen sinc the Internet bubble popped back in 2000, and that I thought it would be a prime candidate for shorting. I didn't do it though, so it doesn't count. In investing, nothing you don't do with real money counts.

I did pull about 25% out of stock funds two weeks ago, with the Dow still over 11,000, and fortunately missed the 200 point plus drop last friday.

Overall, I thought too much good news was priced into the stock market, and its future looked pretty cloudy to me. Everyone was talking about how strong the economy is. And it IS strong - but when EVERYONE thinks it's strong, they bid stocks up to stupid levels, and so I lightened up on stocks, put the proceeds into cash, and then took the opportunity to replace the trusty rusty Saturn SL-1 I had been driving. Hardly a chick magnet.

That's about the boldest market timing move I'll ever make, though - and I would have made it anyway, sooner or later. I was comfortable selling US large caps with the Dow at 11,000. I'm comfortable buying at levels around 10,000 or 10,200.

Going forward, I'm considering a couple of ideas, just for an edge:

1.) Favoring growth & income stocks over a broader index.

2.) Dividing my Vanguard S&P 500 fund into two funds - the Vanguard Large Cap Growth Index and Vanguard Large Cap Value Index. Here's why: At any given time, the two funds taken apart, with a 50-50 split, equal the Vanguard 500 as a whole. And long term, value stocks SLIGHTLY outperform growth stocks last I checked (but there's all kinds of games you can play just by picking time periods. The difference may be statistical noise.)

By splitting my holdings between the two, AND rebalancing back to a 50-50 mix once per economic cycle (as best as one can guess in the middle of it - but once per year seems to be too frequently for my own admittedly coked-up risk tolerance) I would, in theory, effectively buy extra shares of out-of-favor stocks and sell extra shares of hyped-up stocks, while decreasing my risk at the extremes of the market.

You get a similar effect, though, just by virtue of dollar cost averaging into a 500 fund. so it may be more trouble than it's worth. I got the idea from Dan Weiner, a guy who runs a good newsletter called the Vanguard Investment Advisor.

It seems interesting, though, and I thought I'd pass it along. Theoretically, a similar approach based on sector ETFs that all add up to the sector weighting of the S&P 500 could work, too. But transaction costs get in the way except on huge amounts.

3.) Lightening up on REITs. I bought my first REIT fund a year ago, gritting my teeth because REITs seemed hugely expensive even then. But I didn't have anything in that asset class at all, and Id been priced out of my own market for houses, anyway. I got it as an asset allocation ploy rather than as something I thought would do well. I just wanted a broad portfolio that included real estate, large caps, small caps, foreign stocks, and short-term bonds. Passing on commodities and precious metals for now, thanks.

Stayed out of bonds altogether for the longest time, but I did establish a small position at the short end of the yield curve last year. They stayed flat. But the higher quality stuff is beginning to become more interesting to me.

I'd stay away from the high yield stuff for now, although I like them at the beginning of economic expansions. This current expansion seems to be pretty mature to me, though, and high-yield bonds are too economically sensitive for me right now.

4.) Looking at taking some money off the table in small caps, too, for the same reasons. Large caps seem to be the best equity buy at the moment.

I do almost everything entirely in indexes, though. I'm an inveterate Boglehead.

5.) I'd be comfortable buying real estate today almost anywhere except California and South Florida. Unfortunately, I live in South Florida. Although even there I think the lower end housing will be fine. The condo owners on the beach are going to take it on the chin, though.

That's my outlook. Check with me in a year or two, and let's see how this pans out.

Splash, out

Jason