Most investors generally like to diversify their portfolios and use asset allocation in order to reap the best profits for the least risk.  We believe that this is a good time to reallocate your assets as we are beginning to see the transitions from a bearish market to a bullish market.  Firstly, we believe that you should begin pulling money from bonds and treasuries and investing it into stocks or ETFs.  The last continued bullish cycle that we witnessed was during the 80s and 90s.  The chart below indicates pretty clearly that in bullish market cycles, stocks and bonds diverge.

This should give you a good idea of why we believe that bonds are going to continue lowering yields while stocks and funds will give you drastically better returns than the past decade.  Specifically, if you look at the 1984-1987 period of rapid growth following a recession (similar to today’s expected situation) you will see the sharp drop in bond yields.  Thus it is advisable to take most of your money out of cash or cash equivalents except for a necessary emergency reserve.

Another suggestion we have is that you begin moving money over to emerging markets as we suggested in our most recent article.  The increasing US deficit will lead to stronger economies that lend a lot of money to the US ex-Japan: specifically China, Russia, Brazil and India.  Moreover, these nations will outperform during economic recovery since they have more potential for higher return as compared to the slower recovery developed markets will experience.  A France or England is traditionally a safer play but in this environment, there is not much room to go lower whereas there is more room for return amongst emerging markets.  So start transferring from your developed markets to some emerging and you’ll see the payoff.

Finally, you should begin putting money more heavily in mid caps, while retaining your small cap allocations.  Mid caps bore the brunt of the recession, although smaller and larger caps were hit very hard as well.  Ultimately, while we have been suggesting increased risk across the board up until now, we do not suggest increasing allocations in small caps.  Instead move some from your large cap values to mid cap growths in particular.  This is because, small caps have a tendency to move independent of the markets at times during bullish periods.  At the same time, large caps just perform with the markets or barely outperform.  Mid cap stocks at this point in time are reliable stocks that not only nearly assure gains, but also leave opportunities for doubles and triples while the markets just gain 40-50 percent.