So what happened? "I was slow getting back in," says Bengen. "We never got fully invested and are presently invested to the tune of 50% of normal allocations to risky assets. (If a client's allocation to risky assets would normally be 60%, they're now at 30%, and gold is a significant portion of that.)
What's holding him back from becoming more fully invested? "I'd like to see us reach more healthy valuations. On a trailing basis, P-Es are around 24 and I would like to get back in when P-Es are in the teens, which would probably take a market dip of about 20%." In addition, says Bengen, dividend yields are historically low and the "Q ratio" (a measure of under- or overvaluation based on a comparison between a company's stock value and replacement cost) is soaring. "So a lot of indicators are flashing warning signals, but the present flood of liquidity trumps all in the short run, and markets keep rising."
How are clients reacting to Bengen's strategy? "I explain our strategies and performance to clients in weekly e-mails, but some are disappointed we haven't done better the last few years. Nevertheless, most clients trust my judgment, although that may change. If the bull market continues for another year or two, I will lose some clients, but my instincts say it's not time to throw money into stocks."
Continues Bengen, "It's a frustrating period to be investing in. All the lessons I've learned over many years are not carrying the day now. Investors have been through two severe bear markets this decade and a third one could be on its way, which will probably represent a phenomenal buying opportunity."
David J. Drucker is a Principal with Virtual Office News LLC, producer of the Technology Tools for Today Annual Conference and the T3 Newsletter, and a frequent contributor to Financial Advisor.