It's Time to Start Selling

About Latest Posts Motley Fool StaffThe articles listed on this page are compiled by our team of Foolish Writers and …

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Taking on extra risk has been a very profitable move over the past couple of years.

Since March 2009, the ASX/S&P 200 is up around 40%. Over in the U.S., despite all their economic woes, the S&P 500 is up around 90%. Who needs commodities when they've got 0% interest rates and red hot printing presses?

But there are signs the party is coming to an end. Commodity prices have recently lost their lustre. The Aussie dollar has fallen from US$1.10 back to US$1.06, and falling. And the local stock market is off around 5% in the last 3 months.

Is the "risk-on trade" over? It could be, according to GMO's Jeremy Grantham.

Well … maybe a little while longer

Grantham starts out his most recent quarterly letter with an extensive review of times in the past when financial markets got particularly wacky — U.S. small caps in 1974, Japanese stocks in 1989, U.S. stocks in 2000, U.S. housing in 2007, and so on.

Notably, while he saw the reversals of those crazy times ahead of most, he pokes himself for generally being too early in reacting to them.

And yet he's ready to potentially be early on another call: getting out of U.S. stocks right now.

With a rash of factors cropping up to conspire against the global economy — the earthquake in Japan, unrest in the Middle East, etc — Grantham is concerned that without a "QE3" (a third round of quantitative easing by the Fed), riskier assets are a dicey proposition.

As he puts it: "Risk now should be more reflective of an investment world that has stocks selling at 40% over fair value (about 920 on the S&P 500) and fixed income, manipulated by the Fed, also badly overpriced."

The GMO move

In his letter, Grantham gives a pretty clear outline of what he thinks investors should be doing in this environment:

"Investors should take a hard-nosed value approach, which at GMO means having substantial cash reserves around a base of high quality blue chips and emerging market equities, both of which have semi-respectable real imputed returns of over 4% real on our 7-year forecast. The GMO position has also taken a few more percentage points of equity risk off the table."

Large-cap blue chips have been a focus for Grantham for a while now That said, as far as Grantham is concerned, the move right now isn't loading up on stocks — blue chip or not — but rather holding onto some higher-quality positions while trimming the invested portion of your portfolio overall.

Run! Or, run?

So what's an investor to do? It does seem to be a tricky time for investors, and indeed the broad economy. As a group, non-mining Australian stocks don't appear to be particularly expensive, but they are not growing particularly quickly either.

As for the miners, much depends on commodity prices staying high, and that is something a little too difficult to predict.

Here at The Motley Fool, like Grantham, we tend to favour owning high-quality companies paying solid dividends and trading at reasonable prices.

As far as keeping cash on the sidelines, this approach generally has a natural mechanism for increasing your cash holdings — as stock prices rise, dividend yields fall and valuations go up, so there are simply fewer attractive stocks to buy.

As to whether you should sell up some of the more risky elements of your portfolio, that really comes down to your personal risk tolerance.

That said, we — and we're assuming most reading this – are not in nearly the same situation as Jeremy Grantham. At GMO, he has more than $US100 billion that needs allocating, so when the number of attractive opportunities starts to fall at all, his options become a lot more limited.

Since most of us have considerably less than $100 billion that needs to be put to work, it's likely we can still find some opportunities today as long as we're a little choosy.

Over the horizon

Of course while we tend to focus on large, blue-chip equities, we wouldn't want to short-change Grantham by skipping over his longer-term recommendation, which is resource plays and "stuff in the ground" generally.

That bodes well, in the long-term, for resource-focused stocks. In that respect, Gratham would welcome a general market downturn so he could pick up some bargains in the sector. You should too.

This article, written by Matt Koppenheffer, was originally published on Bruce Jackson has updated it.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »