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How To Guard Against Another Financial Crisis Around The Corner?

 May 31, 2011 07:36 PM

Mark Mobius, executive chairman of Templeton's emerging markets group, has been bullish on emerging markets and in general, was optimistic on emerging market economies. Recently, he has sounded increasingly cautious on global economy. 

At a recent gathering, he made the following points:

  • Derivatives are not regulated and in fact, they are growing. 
  • The financial institutions are 'too big to fail'. They are even bigger today than pre-crisis. 
  • Business as usual, none of causes of the previous crisis has not been resolved. 

To summarize, Mobius stated that another financial crisis is around the corner. See here for a Bloomberg report. 

[Related -How To Tell If The Market's Rebound Is Sustainable]

So how to position your portfolios against the coming crisis (we know there will eventually be one, just don't know when)? The following are several measures to consider:

  1. Review your portfolio risk level: it is paramount to re-balance your portfolio to a risk level that you are comfortable with. You might want to ask yourself: what happens if the stock markets dropped 20-30% tomorrow? Can you withstand that? How about 40%?
  2. Diversify, diversify. Though when crisis happens, most likely all risk assets will dive synchronously, no two crisis are the same. Furthermore, it is critical to monitor fixed income, especially long bonds and credit (TED) spread. They can give you some early warnings. Right now, long bonds have risen since the ending of QE2, it is worth to monitor. 
  3. Follow the economy, let markets tell you: at the moment, the economies have definitely slowed down. Risk assets are still at elevated levels. For now, it is a good idea to monitor major asset movements. MyPlanIQ market overview page lists updated major asset trend scores. When it is called for, one should be prepared to underweight risk asset exposures. 

[Related -Bulls Try to Find a Backbone In the Face of Fear and Loathing]

At the moment, hard currency such as Gold (GLD) is somewhat viewed as safe haven, along with U.S. treasury bonds (TLT). Recently, fixed income market has improved due to the series of bad news in economy. Total bond market index ETFs (AGG) (BND) have positive trend scores now. 

It is also a good idea to monitor the simplest model portfolios that have six core asset ETFs as candidate funds (SPY) (EFA) (EEM) (IYR) (DBC) (AGG). These portfolios serve as barometers on how diversified and tactical portfolios have behaved recently. See Six Core Asset ETFs plan for more details.



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