A great many investment portfolios are broken and need fixing. Investors have mistakenly assumed that they should continue doing the same things that worked during the past bull market. The times and circumstances have changed and a prudent investment strategy should adjust accordingly. Given the unique causes and circumstances of this bear market, simply holding your current portfolio waiting for those stocks to go up to break even may be the worst course of action.

During the 1990’s, many investors poured money into high-tech telecommunications companies and large-cap growth stocks such as the S&P 500 Index fund. Even as the prices on these companies became overvalued, additional investments continued to pour in pushing them even higher. When the inflow of new money stopped, the bubble burst. Today, the largest company’s stocks are still overvalued by historical averages.

Many investors have given up on the stock market. Record amounts of money have recently been taken out of stocks and put into bonds. These investors assume that at least their money will be safer in cash or bonds. These assumptions are wrong.

One of the greatest dangers to investors today is the dollar. The value of the dollar has dropped against foreign currencies and will probably continue to drop over the next two to three years.

The fact that the devaluation of the dollar hasn’t caused inflation is due only to the weak economy causing deflating prices in equal measure. Companies, hard hit by the recession, have been forced to lower the cost of their goods and services to compete for lackluster business. Zero-percent financing and lower margins have offset the effects of a dramatic increase in the money supply. If the economy recovers, we will see a significant jump in inflation.

With a weakening dollar, cash and bonds are some of the worst investments to own. Interest payments will be fixed while their buying power declines. Even if interest payments manage to keep pace with inflation, investors will be taxed on the interest they receive.

Investors should keep at least half of their assets outside the US dollar. This means investing in foreign bonds, foreign stocks, and hard asset stocks. Hard asset stocks hold their value during inflation because they own tangible resources such as oil and precious metals.

The last bull market was extraordinarily long. In that market, investing was fun and easy. Investors who are expecting a quick return to similar conditions have portfolios that are not well-positioned to protect their assets from today’s potential risks.

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