01/11/2011 07:29 pm ET | Updated May 25, 2011

Fools Rush in...

Many market trends are "obvious" to readers of my books and blogs. Here are some of them:

  1. The U.S. will become a third world country;
  2. The dollar is doomed;
  3. Inflation is inevitable;
  4. Interest rates will rise dramatically;
  5. Municipal bond defaults will rise at an alarming rate. Now is the time to dump municipal bonds.
  6. The stock market will continue its recovery well into 2011, and probably longer.

I don't understand why anyone is interested in my opinion on any of these issues. They could be right or wrong on any or all of them. I don't have a clue.

I believe the markets have taken all of the facts that underlie these beliefs into consideration and have priced the dollar, stocks and bonds accordingly. I also know that most investors make terrible investing decisions based on whatever their beliefs may be. Here's my take on a prudent course of action.

If you believe the U.S. is doomed (and even if you don't), your portfolio should have exposure to international stocks. Most experts recommend a range of 30%-50%.

If you believe the dollar is doomed (or not doomed), consider a globally diversified bond portfolio for that portion of your assets allocated to bonds. The SPDR Barclays Capital International Treasury Bond ETF (BWX) is a good place to start.

As for inflation and interest rates, whether or not you believe these are risks, your bond portfolio should consist of short or intermediate term bonds (with maturities five years or less) in an index fund or an ETF. As those bonds mature, they will be replaced by new ones that will reflect current interest rates. It's your personal hedge against inflation.

What about the municipal bond issue?

If the market perceives municipal bonds as risky, issuers will have to offer more interest to compensate for the higher risk of default. Historically, riskier assets have higher returns over time than less risky assets. If you can afford the increased risk, and are prepared to hold on for the long-term, maybe this is the right time to buy a low cost municipal bond ETF, like the iShares National Municipal Bond ETF (MUB).

Many investors are fleeing bonds and going back to stocks, now that the pundits are predicting a continuation of the stock market recovery. The fact that they failed to call the recovery when the markets bottomed out in March, 2009 does not stop them from making more predictions. It also doesn't deter investors from believing they have the ability to predict random events.

Net inflows to bond funds (and out of stocks) peaked in October, 2009 at $231 billion. Think of all those hapless souls, relying on the financial media and their brokers and advisers, who "fled to safety" and missed out on the dramatic market recovery which continues to this day. Your asset allocation shouldn't change with the latest survey of self-styled experts, economists or others.

Endless talk and conflicting opinions fuel fear and uncertainty. Fear compels investors to make trading decisions. Trading decisions benefit brokers and their firms. It's a crazy cycle, which repeats endlessly.

Only advice based on long-term data qualifies as investment advice. If you're paying for any other kind of advice, understand the price may far exceed the fees you are paying.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.