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How to Follow Marc Faber's "Ultra-Bearish" Investing Advice

By: StreetAuthority
Posted: 1/30/2013 9:30:00 AM
Referenced Stocks: EWJ;GLD;PGJ;SCHH;VNM

"Every generation throws a hero up the pop charts." 

But for the purpose of this article, I would change these famous Paul Simon words slightly to "Everymarket cycle throws aninvestment guru up the press charts."  

And the pontificator du jour is Swiss economist Marc Faber, a lifelong investmentcontrarian who is also known by the moniker "Dr. Doom."

Faber is most famous for warning his readers to dump theirstock holdings prior to the market crash of 1987. He also predicted thebull market for oil, precious metal, commodities andemerging markets -- particularly China -- in 2002. In 2009, he predicted the U.S. stock market bottom, and was right in his predictions for 2011/2012. In addition, his prediction that the Federal Reserve would step in with unlimited quantitative-easing programs has come to pass. 

It's no wonder Faber has earned quite the reputation for being an accurate market predictor. 

So what does Dr. Doom say about 2013?

He is convinced investors are way too optimistic about the U.S.economy for 2013. Here are his words from his "Gloom, Doom & Boom" monthly report :

"That something is not quite right with the economy is evident from the recent performance of Wal-Mart, Tiffany, Genesco, and Kohl's. What disturbs me about mostasset markets is that we had outsized gains since early 2009 (there are exceptions such as Vietnamese, Chinese, Japanese, and Europeanequities , and also U.S. housing).

In my opinion, investors' expectations about future returns on their assets are far too optimistic. In a world that currently hardly grows, investorswill need to reduce their future return expectations. I believe 2013 will not be a favourable year for holders of assets. My priority has now shifted to the preservation of the outsized gains I have achieved over the last three years." 

He cites a breakdown in the technical picture of the U.S. market and 2012's huge bounce from the lows as reasons for hisbearish proclamation.

If investors still want to ownstocks , then he recommends Vietnamese, Chinese and Japanese.

And despite referring to himself as the "most bearish person on Earth" duringInvesting " conference, he suggested a diversified portfolio to weather 2013. 

His exact recommendation: Diversify your portfolio into four segments. 

These segments are 25% in equities, 25% in precious metals, 25% incash andbonds , and 25% inreal estate . Faber said he doesn't expect any of these asset classes to increase substantially this year, but they are likely to preserve your wealth. 

And because there's no information available about Dr. Doom's portfolio holdings, the next best thing is to design aproxy portfolio based on his recommendations. 

So I built a portfolio based on his "25-25-25-25" allocations. And since the main point is to "diversify," I think exchange-tradedfunds ( ETFs ) is the best route to take so single-stock risk is minimized.

 25% stock allocation
Because Faber clearly does not like the U.S. stock market at the current levels, and leans toward Japanese, Chinese or Vietnamese stocks, an equal allocation to ETFs that track their respective markets should fit his recommendation.

The iShares MSCI JapanIndex ETF ( EWJ ) , the Market Vectors Vietnam ETF ( VNM ) and PowerShares Golden Dragon ETF ( PGJ ) are my favorites in this category.

25% in precious metals
The SPDR Gold Trust ( GLD ) is a good fit for this segment of Faber's proxy portfolio. This ETF replicates the performance and price of the gold bullion.

25% in cash and bonds
Sticking with his words to the letter, an equal allocation to cash and bonds make sense. I like Vanguard's Total Bond MarketIndex Fund (VBMFX) to mimic the broadbond market.

25% real estate
The Schwab U.S. REIT ETF ( SCHH ) provides deep and wide exposure the U.S. real estate market fulfilling this segment of Dr. Doom's 2013 proxy portfolio.

Risks to Consider: While I can find little fault with Faber'sdiversification recommendations, no matter how accurate a market guru has been in the past, there's no telling when a major mistake will occur. Should the U.S. stock market continue higher on its currentbullish path, then Faber's followers will miss out on profiting from the strong bull market already underway. 

Action to Take -- > Although I see the U.S. stock market continuing higher for at least the first half of 2013, Faber's 25-25-25-25 suggestions for a diversified portfolio make sense if your intention is merely to preserve wealth.