The investment environment is incredibly difficult to negotiate at the present time.
- Will all of this money printing result in inflation or deflation?
- As economies round the world struggle will economies depreciate their currencies to boost exports. Is it a race to the bottom?
- What is the outlook for stocks. Have we seen major highs for the year or will Bernanke QE3 ( QE infinity) still boost asset prices.
- What of property? Will the interest rates ever start rising stopping the housing market in its tracks?
- Will prime London house prices stop increasing? What is driving this seemingly bizarre phenomena going against the grain of the rest of the UK property market?
- What of precious metals? Will gold hit new highs at some in the next 12 months, consolidate or start to decline?
- Will China have a hard landing? What will be the impact on commodity prices, exchange rates?
As you can see there is an endless stream of questions which no-one knows the answer too. In this sort of environment it makes sense to hold a reasonably diversified portfolio across asset classes: cash, commodities/ precious metals, stocks and property. A 25% allocation, as suggested by the great Marc Faber, seems reasonable.
One asset class to avoid however is bonds, in particular government bonds. There has been a 20 year bull market in bonds which must be nearing the end. Bond prices have been bid up to crazy levels. It seems crazy that companies are happy to lock up their funds for 4 years investing in government bonds of countries like Germany, Switzerland and the UK for a return less than inflation. It just does not seem logical.
There is a rule of thumb which applies to bonds, that if you hold a bond with a ten year term, a 1% increase in the yield of a bond will result in the bond price reducing by 10%. Just be very careful because you don’t want to be on the wrong side of the market when the sovereign bond market eventually blows up. Check your defined contribution pension schemes as a significant majority of you will be holding some funds in government bonds in your pension funds which you need to exit.
In terms of stocks, look for value. Japanese stocks look cheap at the moment and have done for a while, but the market will turn one day and Japanese stocks will provide you with a great return. Hold some dividend payers, the usual names in the FTSE 100 are BP, British American Tobacco, Shell, Scottish and Southern and within the FTSE 250 there are some great non-life insurers that have been battered down along with the banks but provide awesome dividend yields.
Have a look at some of the gold mining majors. As in the 1970′s when inflation took off, the gold miners went up like they were on steroids. Gold miners are currently cheap versus the price of gold ie. they have not followed the gold price up as strongly. They are slowly catching up but at the moment are still available for reasonable value.
Hold a bit of cash. We do not know whether we will face armageddon in the next year but we know there is a significant chance that stock prices will fall. If this occurs, by holding cash it enables us to pick up any bargains which may arise. Make sure all of this cash is not held in sterling though. It’s easy enough to open Dollar, Swiss Franc, Norwegian Krone accounts for a small monthly fee, right here in the UK.
Sorry, it has been a while since I last posted. I have so much to get down on paper but this serves as a quick introduction to the many questions and thoughts swirling round my mind at the present time.
As ever good luck with building your investment portfolio. Happy investing and good luck on your path to financial independence!