Prepare Your Portfolio for Summer

A word to the wise: in the last year, pessimists fared poorly in the marketplace. The cautious were burned, in that the value of their assets crept up while the daring raked in returns hand over fist.

Israeli share prices have spiked to record heights. Abroad too - the greater the proportion of shares you had in your portfolio, the better you did.

That doesn't mean that what was, will be. One day the trend will turn and share prices will start to retreat. That's how it works. And don't trust your investment adviser to predict when that will happen.

Given that the investment managers don't know, they have to run with the rest of the herd, because the worst thing for an investment manager is to proffer wilted weeds while his colleagues make hay. If everybody loses money, that's another thing entirely: then it's the market's fault.

Today is the perfect time to stop the mad dash for a moment and think about your portfolio. The maddened dash in the stock market is the main reason why; the higher the market climbs, the riskier it becomes, practically by definition.

Another reason to stop and think is the rocky security situation. Not a few people are openly talking about a major conflict in Gaza this summer, and/or on the northern border. The combination of record share prices and exploding borders could be a volatile one for your portfolio.

What can an investor worried about the future do? Here are some points for thought.


The fastest way to reduce risk in your portfolio is to reduce your shares component, mainly your component of smallcaps (the broad-market ones). By nature, smaller companies are the first to be hurt in an economic downturn. They are also the ones that posted the steepest gains in the last year, and will, again by nature, suffer the steepest losses when the boom drops.

There is another way to reduce risk: transfer your money from Israeli stocks to foreign ones, by investing in ETFs that track foreign indexes. That won't protect you from a global downturn, and will also expose you to the risk that the shekel will continue to appreciate against other currencies. But you do reduce your risk of a local conflagration this summer.

2. Bonds

Most of Israel's public has most of its money in bonds, not shares. But they too have risen to heady heights, which portends a fall in the future. And, they're also exposed to the security situation. Why?

Because mutual funds, including ones that specialize in bonds, put a lot of their money into corporate paper, that's why. Sometimes they choose bonds of relatively small companies, which as we mentioned before, are more sensitive to downturns. They also put money into long-term Israeli government bonds, the kind that come due in the distant future. Both avenues are high-risk and if the security situation crumbles, they'll dive like ducks.

The cautious investor should firstly make sure that his investments are in government bonds, or high-grade corporate paper, not the debt of some bitty company nobody's ever heard of. Secondly, opt for shorter-term government paper, the kind that matures in a few years. That's a good idea in any case: after the gains this last year, the prices of Israeli government bonds have risen above the prices of comparable U.S. treasuries. Israeli bonds don't have much more room to rise in price.

3. The dollar

Israelis used to feel that the dollar was a safe haven for hard times. Every time a terrorist blew up a bus or something nasty happened in the macro sphere, the dollar-shekel rate would spike.

No more: The dollar has become enfeebled in world markets and the shekel stood strong as a rock during the last war (the Second Lebanon War last summer), proving that USDs under the mattress aren't an insurance policy any more.

Interest on dollar deposits is not bad at all; it's certainly 1% higher than you'll get on a comparable shekel deposit. But don't expect the dollar to shine forth, even in the hottest days of the summer.

4. The shekel

Warren Buffett used to say that the biggest privilege of the investor is to do nothing. If you don't see an attractive investment out there, don't move.

He also used to say that there are two rules to investments. One: Don't lose money. Two: Don't forget rule No. 1.

Yup: investment in fixed-income shekel vehicles generates a pitiful 2% or 3% a year. But that's where you'll lose the least if and when the summer explodes.