Need the Best Wealth Management Advice for What is Going on Now?
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Posted On :
Dec-22-2010
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Article Word Count :
1692
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“Listening to the media I hear that the economy is doomed, the Federal Reserve has lost its influence and deflation will be the result, but printing money will cause inflation, all of it will cause devaluation of the dollar, the government is out of control, etc.
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“Listening to the media I hear that the economy is doomed, the Federal Reserve has lost its influence and deflation will be the result, but printing money will cause inflation, all of it will cause devaluation of the dollar, the government is out of control, etc. I need the best wealth management advice. What should I do?”
If this is what you are feeling or thinking or it sounds familiar, you are not alone. But given that many other people are thinking these same thoughts, why are global markets continuing to rise? There is an old saying that “the market climbs a wall of worry.” So this all sounds like there are a lot of reasons to worry! I will examine each of the conditions and fears as well as. I will also offer an explanation of the logic behind this so-called “wall of worry” phenomenon.
Inflation, Deflation, Devaluation
A great case can be made for all such potential outcomes. The Federal Reserve is rapidly “printing money” by way of quantitative easing or, technically, borrowing money to buy up bonds in the open market. It is indeed a possible outcome of this policy that the economy will see inflation. As a matter of fact, a specific type of inflation is their likely objective. Inflating the market value of real estate will help relieve the housing and debt crisis facing the economy. But, indeed, if they do not back-pedal on this policy as soon as inflation is ignited, a cycle of higher inflation than intended across the entire economy could occur.
On the other hand if credit remains tight, it will slow this reflation process. Furthermore with the last of adjustablerate mortgages issued during the real estate bubble reaching their adjustment date in the coming months, and housing prices still depressed, additional foreclosures are likely. Add in the high inventory of homes for sale, existing foreclosures for sale and bank-owned properties that have not yet been marketed, and there is a valid argument that more deflation on top of that which was experienced in 2007- 2009 could occur.
In either case, a potential outcome could easily be that the global confidence in the U.S. economy and thus the demand for U.S. currency and U.S. government debt declines. That would pressure the dollar to continue its devaluation that has been going on for a few years now.
But inflation, deflation and devaluation are all normal phases of economic cycles. We have experienced periods of all three over and over again throughout history, and frankly this environment is not particularly unique. So, what to do? First I’d like to talk about …
What Not to Do
Under all these conditions, leaving one’s money “in the mattress,” i.e., in shortterm assets like savings, CDs, money markets, short-term bonds, all of which presently pay nearly nothing, will not preserve the purchasing value of one’s wealth. With inflation and devaluation, the dollar loses value by definition. With deflation, while cash and cashlike savings vehicles increase slightly in purchasing value, they do not do so to a large enough extent to offset the decline in value of most investors’ other assets, namely their homes, investment real estate, businesses, etc. Leaving money in cash and equivalents is nearly guaranteed … to contribute to the reduction of one’s wealth and long-term financial well-being.
What About Gold and Other Hard Assets?
Under normal circumstances precious metals are typically a good bet to increase in value under these economic conditions. But the prices of precious metals have already inflated by hundreds of percent over the past few years. A very logical case could be made that the prices have already adjusted by double or triple what they should have given where we are economically. By extension it would not be illogical for the price of gold and other precious metals to fall, even significantly, from current levels even with inflation, deflation or currency devaluation simply because their prices have gotten ahead of themselves. That said there is indeed a place for some precious metals in one’s portfolio. Moreover, there is a form of participating in them that far out-trumps owning the commodities themselves. More on that later.
Can’t Afford to “Lose It Again”
After the gut-wrenching crash of global securities markets experienced over the 2007-2009 period, people are understandably shaken. So it is difficult to separate one’s emotions from facts. Research confirms that investors who have trust in their advisers, and are with advisers who can separate emotion from economic reality, are in a much better position than those who either manage their investments themselves or who participate in the process. This conclusion is based on years of research compiled by organizations such as DALBAR that confirm over and over again mutual fund investors “get in” after investments have already reached full value or higher and get out after they fall to the level where they should be bought, not sold.
What Should I Do?
Very few investors can afford to permanently lose a large portion of their life savings. The good news is that permanent losses can be mitigated while still maintaining one’s purchasing power over time. The not-so-good news is:
1. In order to maintain and grow one’s purchasing power over time, as alluded to earlier, putting one’s money in cash, CDs or short-term low-interest-paying investments is not a viable option
2. Periodic declines (not to be confused with losses) must be endured.
Permanent loss is generally caused by one of two avoidable actions, or both: investing in securities at prices well above their real worth, or selling investments at a loss when their prices are below their real worth. At FIM Group we mitigate the former by doing extensive research and analysis on everything we purchase. Having done that detailed work gives us the confidence to invest in securities when they are underappreciated by the general market, hold onto solid investments when others are creating real losses by selling, and add to positions we already own when their market price is dropping, rather than panicking or remaining frozen like deer in the headlights. The courage to hold or buy when others are selling (and the courage to walk away when others are buying at overvalued prices) are some of the main factors that have contributed to FIM Group’s long-term performance for our clients.
Furthermore, we favor assets that are both poised to thrive in a slowgrowth economy as well as defend against severe market volatility. We favor securities in industries that are steady regardless of the economy such as food, health care and utilities. We also favor industries poised to benefit from global economic growth such as global investment companies, energy and commodities. Speaking of commodities, while the price of gold has risen sixfold from its bottom, the price of the stocks of many precious metals and commodities companies has risen by only a fraction of that value. This relationship is not rational. It is caused by emotional investors wanting to own gold bullion (via coins, ETFs or mutual funds) but afraid to own the stocks of such companies. Eventually this relationship must revert back toward parity. Therefore, there is much more leverage and less risk in owning these stocks than the metals themselves. We own several of these companies in our portfolios.
We also reduce risk in portfolios when conditions warrant doing so. Recently you might have noticed a flurry of activity in your diversified portfolios. As the markets around the world have continued to march higher, we have chosen to “ring the cash register” on some of our securities. I will not get into which ones we sold in detail, but in general we have had many securities appreciate to levels at which their implied return-to-risk ratios no longer meet our conservative requirements. We have also been lowering the risk profile or asset allocation of portfolios by adding defensive investments such as some long-dated U.S. Treasuries as well as AAA-rated U.S. Treasuries and foreign government bonds of stable economies that not only pay more in income than many short-term U.S. bonds, but have the added benefit of being quasi-hedges to both devaluation as well as global stock market shocks.
In other words, the question of “What should we do now?” is already being answered and acted upon in your diversified portfolio!
Climbing the Wall of Worry
During periods of uncertainty, and especially after major bear markets, private investors are overly cautious. As Paul Sutherland mentions in his article, individual investors presently have massive amounts in money market funds paying them zero, zip, nada, and are pouring nearly all additional savings into money market and bond funds with very little going into stock funds. They are doing so despite that facts that retail sales in the U.S. have rebounded to within a fraction of all-time highs, corporations have the healthiest debt-toasset ratios in more than a generation, stock price valuations are below their historic averages and many blue chip stocks, even after having recovered much of their declines, are paying dividends well in excess of 10 and even 30-year Treasuries. So with all that cash sitting on the sidelines, there is huge pent-up demand for stocks and supply of money to fuel their advance. As each investor capitulates his or her fear and moves money into stocks, their prices continue to “scale the wall of worry.”
Based on history, we are still very early in the typical five-year advance following major bear markets. The vast amount of cash sitting idle is the fuel that pushes the price of stocks back up toward their intrinsic values. Yet we don’t make any decisions on, or predictions of, which way “the market” may move. On the contrary, we do “scenario testing” for every investment decision we make giving equal thought to markets moving in all three potential directions – up, down and sideways. Our job is to participate in the logical increase in the prices of undervalued securities, but to do so with a defensive, smart, opportunistic approach.
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Article Source :
http://www.articleseen.com/Article_Need the Best Wealth Management Advice for What is Going on Now?_45591.aspx
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Author Resource :
Article Source: whyisfinancialplanningimportant.net
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Keywords :
best wealth management advice, commodities, why financial planning is important,
Category :
Finance
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Finance
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