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Author: wburble Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35351  
Subject: Re: Asset Allocation & Bond Mutual Funds Date: 2/4/2011 9:12 AM
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I think the problem is that both equities and fixed income can be viewed as overvalued.

If interest rates are low and expected to go higher, and inflation is anticipated, then theoretically one shouldn't be buying bonds, one should be selling bonds, i.e., borrowing money. Or "going short" bonds in some fashion (I wouldn't know how to do this).

That's actually what some big corporations have been doing such as microsoft--issuing debt at low interest rates.

The problem then is what does one do with the resulting cash if one is borrowing it rather than lending it? That is, if one assumes equities are overvalued too?

Well it seems as if the levels of cash being held by corporations is pretty high, and they are upping dividends. IOW even the corporations don't know what to do with all that cash.

Yet inflation rears its ugly head; the real value of the cash is likely going to disintegrate over time. I think it is virtually impossible that we will not have a significant jump in inflation over the next few years. (What "significant" actually means is guesswork.)

So--that leaves the original problem--what to do with cash? You can't buy equities, they're too expensive; you can't buy bonds, they're too expensive; and if you sit on the cash inflation will eat it up.

The only thing left, it seems to me, is using the cash to invest in real, income generating assets. I'm not talking about precious metals which don't generate income.

How the individual investor would go about finding a reasonably safe income generating real asset, esp. if we are talking about within the confines of tax advantaged investment such as an IRA or 401(k), is entirely beyond me.

An alternative would be trying to get really really good at individual stock picking, and try to find some relative bargains with reasonable growth potential. But that means you have to be a good stock picker and put in all the work that implies. Not a "passive" investing strategy at all. And, beyond the realistic capabilities of many of us.

I think patience is called for at this time. I don't think it's wise for most individual investors to borrow/leverage themselves although I suppose some have the knack for it, but most don't. The one glaring exception might be that now may NOT be the time to pay down one's home mortgage, if one has one, at a low interest rate. That's not to say I would necessarily rush out to get a home mortgage if I didn't already have one, even assuming I could figure out what to do with the resulting cash proceeds.

It's a puzzling time.
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