How Do You Choose Which Assets Classes to Invest In: Stocks

Stocks have two basic things going for them. Over the years the US stock market has outperformed real estate, bonds, and money in the bank. And, the stock market offers liquidity that real estate investments lack. You can buy a stock one day and sell it the next. Try doing that with a piece of real estate! So, why shouldn’t you put all of your investment capital in stocks? If you remember the 2008 stock market crash, the dot com crash, or the various other market crashes going back in time you can see that there can be risk in investing in stocks. There are ways to deal with that risk such as by choosing a range of stocks instead of just one or two and learning to assess intrinsic stock value as a guide to profitable investing.

How Do You Choose Which Assets Classes to Invest In: Bonds

We discussed treasury and corporate bonds in our article entitled how to invest without losing any money.

US Treasury bills have maturities of a year or less. US Treasury notes have maturities from two to ten years. And, US Treasury bonds have maturities of ten to 30 years. Each of these investment vehicles is backed by the “full faith and credit” of the US government. The risk of loss of any of these if held to maturity is nil.

How to invest without losing any money in US Treasuries is to hold them to maturity or only sell them at a profit.

The same approach applies to AAA corporate bonds issued by Johnson & Johnson or Microsoft. These asset classes do not outperform the S & P 500 over the years but they do outperform a lot of individual stocks. If want you want is to keep your money safe, not lose any, and make a decent rate of interest along the way, bonds as an asset class are a good addition to any investment portfolio.

How Do You Choose Which Assets Classes to Invest In: Cash and Short Term Investment Vehicles

If you believe you will need your money fairly soon, you do not want to tie it up in stocks, long term bonds, or real estate. Any of these asset classes may go into a slump and that would mean that you lose money when you take your cash. A good way to get a little interest on your money is to create a ladder of short term bonds or even CD’s at your bank. You will always have cash available when needed. This asset class does not outperform any of the others but it is the most flexible. There are a lot of smart investors who hold cash when they do not trust which way interest rates, the stock market, or real estate prices are going.

How Do You Choose Which Assets Classes to Invest In: Real Estate

Your own home is the real estate investment that you need to make first and foremost. Long term real estate investment is a skill that needs to be developed over the years and hopefully not by losing money along the way. If you want to take advantage of profits from real estate and not sink all of your money into a piece of property, consider REITs which are real estate investment trusts. These are investments you can get  into for a reasonable amount of money and get a good return. And, you do not need to manage the property yourself!

How Do You Choose Which Assets Classes to Invest In: Gold

Gold bugs think that sooner or later all paper currencies will be worthless. Thus, the only way to retain any value for the future is to hold precious metals. The problem with gold is that it does not pay a rate of interest and its price goes up and down. If you want to have a little gold as a reserve, just in case, there are to viable approaches. One is to simply wait for the price of gold to plummet and then buy. The other is to use cost averaging. Buy the same dollar amount of gold every month or so. Gold is a valid hedge against catastrophic economic and social events but the S & P 500 has been a better choice over the years.

How Do You Choose Which Assets Classes to Invest In? PPT

In posing the question how high can stocks go, we should consider fundamental analysis of individual stocks, the markets in general, the US and world economies, and the prospects of other, non-stock, investments in the near term future. And, one should always consider the lemming effect, the herd following market leaders, even when all of them are heading for the proverbial cliff.

Does Government Policy Set Market Prices?

Wall Street hit a record high and markets across the globe followed. Japan‘s Nikkei 225 index is up to nearly a five year high. In both cases much of the enthusiasm has to do with Federal Reserve/Central Bank policies. Somewhere around $7 Trillion in equity was erased when the markets tanked in 2008. Governments bailed out banks to keep credit markets afloat and engaged in gigantic stimulus programs to get their economies going again. Much of the enthusiasm in the markets comes from an optimistic view of how much longer the Fed and other institutions will continue to promote growth with their policies. How high can stocks go? That depends on the Fed and other central banks and on the perception of the market.

How about Individual Stocks?

Picking new winners in the stock market typically has little to do with the general state of the economy or monetary policy. The success of a new company has to do with its products and its sales. Intrinsic stock value is the expected future earnings of a company discounted to current cash. When a stock is underpriced as compared to its future earnings potential it is a good buy and when it is overpriced in this regard it is time to sell. How high can stocks go in this regard? Microsoft grew about two thousand fold before it corrected and leveled off a few years ago. No matter what the economy is doing there is a bio tech company out there that will come up with a cure for diabetes, Alzheimer’s, or heart disease. How high can stocks go when the company has a unique product? The sky is the limit.

Is the Market on Track or Is the Market Crazy?

If you believe that the world economy will get back on track, that North America and Europe will regain full financial health, that these two giant economies will continue to lead in innovation, you want to own stocks in these economies. If not you will want to look elsewhere. If you believe that the BRICS nations will grow and prosper you will want stocks in Brazil, Russia, India, China, and South Africa. If you think there are problems, such as potential BRICS development bank problems that we mentioned recently, you will want to be careful there as well. As we consider how high can stocks go we should also consider what will happen if there is another major shock to the markets such as an expansion of the war in Syria or even conflict with Iran over its nuclear ambitions.

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Diversify Your Investment Portfolio to Gain Variety and Opportunity

When you diversify your investment portfolio you invest in a variety of assets. Because the value of each investment does not go up or down in perfect harmony, diversification averages out risk, as well as gain. To the extent that one is looking to a big gainer, having more stocks, real estate, or other assets may serve to increase the odds of success. In their book A Random Walk Down Wall Street the authors note that the best return in stocks is often a basket of about forty small cap stocks. These stocks are priced low because of the risk inherent in small companies. However, if you diversify your investment portfolio with a large number of these stocks, you increase the chances of finding a huge winner which will negate the effects on the portfolio of a handful of losers.

There Is Always a Bull Market Somewhere

Not all investment vehicles go up and once or down at once. As an example, when the price of oil goes up, the price of oil company stocks generally rises. At the same time the prices of industrial stocks, hit by the higher price of energy, typically go down. By investing in stocks in several sectors you can often average out gains and losses. The idea here is not to hedge risk only, however. Each stock, each investment needs to be looked at with thorough fundamental analysis in order to pick investments with a high expected rate of return and a significant margin of safety against loss during bad times. To the extent that economies like those of the BRICS nations are rising faster than those of Europe or North America, it may be wise to diversify your investment portfolio with emerging markets in mind. To the extent that there is a transparency problem when investing in China, Russia, India, Brazil, or South Africa, it is often wise to diversify your investment portfolio with an eye toward keeping part of your money in North America.

Choice of Investments when You Diversify Your Investment Portfolio

Diversification is not a substitute for simply picking good investments. Investing in gold can be a good idea under the right circumstances as can investing in beer be a good idea. Investing in oil, investing in China, and picking new winners in high tech stocks can all be profitable undertakings. However, a smart investor picks his stocks wisely, routinely watches each investment in his portfolio, and buys and sells investments accordingly. When you diversify your investment portfolio you do not commit to a “buy and hold” strategy. Rather you choose investments that fit a rational approach aimed at increasing opportunity while also reducing investment risk.

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Austerity versus Growth Strategies

The raging argument throughout the European Union is whether to stimulate economies to encourage growth or hunker down, reduce government spending, and little by little pay off debt. Many of the smaller and Southern members of the EU have national debts that they cannot pay. The most famous is Greece. A Greek financial collapse has been averted only because the EU believes that a collapse in Greece would spread across Europe’s southern flank to Italy, Spain, and Portugal. Austerity measures have thrown many out of work and brought down governments such as in France. Cyprus is under the gun because the EU is demanding austerity measures including raiding personal savings accounts to pay off government debt to the tune of €5.8 billion.

Faith in Banks or Lack of the Same

Those who have chosen to avoid stocks, bonds, hedge funds, and the rest over the years have commonly chosen to simply put money in the bank. Many may have missed out on great profits, at times. And many avoided losing most of their acquired wealth because they were not it the stock market when it crashed in 2008. Now, it would appear that Cyprus is raiding personal savings accounts to pay off government debt. Perhaps the EU is excited about the prospect of getting ten percent or more of laundered Russian mafia money to help pay off Cyprian debt. But the folks who vote in Cyprus also have savings accounts and loss of faith in the banks could lead to a run on banks in Cyprus and elsewhere. It could lead to a loss of faith in the current Cyprian government and new folks in office next time around.

Where to Put Your Money Now

Are we going back to the day when families put their gold coins in a clay pot and buried it under the fireplace? It was certainly a way to keep money safe, unless of course you think about the fact that the gold bull market may well have run its course. Will folks in Cyprus simply keep cash at home instead of banking it? If the government makes a practice of raiding personal savings accounts to pay off government debt, a viable solution might be to buy property, collect rent checks, and wait for the financial crisis to burn itself out. Taking a wider view, the example of confiscating money in bank accounts may send shivers across Europe and across the Atlantic. It could possibly wreak havoc in financial markets worldwide.

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Picking Investments with Inflation in Mind

A standard means of evaluating an investment is to look at intrinsic value, especially when investing in stocks. Intrinsic stock value is the actual value of a company or stock based on the sum of future income, based on fundamental analysis, and discounted to current value. In determining intrinsic value investors use treasury bills as a benchmark as the prevailing interest rate is tied to expectations of inflation. Thus, when considering investment and the value of money, the expected rate of inflation is paramount. An investment may be growing rapidly, but if inflation is eating away at the purchasing power of the local currency, it may really be losing money over time. In our article about Three Good Offshore Investment Ideas, we look at investment opportunities in growing economies and in economies in which the currency is outperforming the US dollar, Euro, and Yen.

Growth, Stagnation, and Speculation

Microsoft was a hot stock for years. The stock value multiplied about two thousand fold from when it was first issued until the stock peaked. Now Microsoft is a huge corporation with a very secure future. However, it is essentially done growing. Considering investment and the time value of money, Microsoft is sort of like putting money in a savings account at less than a percent a year interest. The money will not go away rapidly but the purchasing power of what you have will dwindle year by year. A common means of measuring the strength of a currency is to note its buying power of a mixed basket of commodities. How much gasoline or bread can a dollar buy? How much gold and how many cars can you purchase with the Yen? The standard argument for gold, during a bull market, is that gold holds it value. However, gold is a commodity that is prone to speculation. Currently it may be time to sell gold as it seems set to fall. Regarding investment and the time value of money a balanced approach of precious metals, stocks tied to commodities, real estate, and a sprinkling of growth stocks may be the best bet. But, always do your own fundamental analysis!

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“There are a number of attractive options for investing in gold and there are pitfalls. Gold stock investing includes mining companies and derivatives. Many gold bugs will say that how to invest in the stock market during hard economic times is to invest in gold. However, the true gold bug will advise that you buy and hoard gold bullion or rare gold coins. A current scare tactic in the gold coin market is that “the government will come again for your gold.” Roosevelt signing his executive order to prevent gold hoarding is rewritten as the confiscation of gold. Gold peaked in 1980 after a decade of inflation and promptly dropped. Gold bullion has not made it back to 1980 prices adjusted for inflation despite a fourfold increase in value in the last decade.”

If you bought gold thinking that the world economies were going to heck in a hand basket you probably made some money, providing that you got in early and got out when prices leveled off in the last year or so. The reference above to gold peaking in 1980, falling, and remaining in the $200+ range for nearly two decades should be kept in mind if you are wondering if it is time to sell gold.

In what way is Gold a Profitable Investment, and When?

An argument for gold is that there is only just so much of the shiny stuff in the world. The argument continues that all of the more easily mined gold in politically safe locations has been mined and in places like South Africa they are mining gold over two miles beneath the surface (East Rand Mine, Boksburg). Thus the price of gold will go up, the proponents of gold say. Also the US and other major economies are in dire straits due to the slowly resolving recession. National budgets are constantly in the red and currency values are sliding. Proponents of gold constantly remind us of the Weimar Republic, the German post WWI government where inflation went wild and paper money became essentially worthless.

However these arguments played to investors during the first decade of the century and immediately after the financial collapse of 2008, the world is ever so slowly coming out of the Great Recession of 2008. Investor confidence in the stock market is a good measure of this. To the degree that panic drove up gold prices, gold is probably priced above the value that fundamental analysis would dictate. As such it may well be time to sell gold. However, before you do, carry out your own analysis and be clear in your head what you are doing, and precisely why.

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Invest in Your Own Back Yard, or Not

Providing that you are willing to do a bit of research into profitable investment alternatives, we can suggest, as we did in a previous article, Three Good Offshore Investment Ideas. As we noted,

The worst recession in three quarters of a century has taken its toll on economies throughout the world. Some have been hit worse than others. Some countries will come back strong. And, some countries never had a recession.

We went on to mention Brazil, Colombia, and Panama where Investment and the Panama Canal Expansion go hand in hand. When growth is not so good at home it is often time to look for profitable investment alternatives offshore.

Taking a Second Look and Doing Your Homework

It is very tempting to hand your investment portfolio off to an expert who promises to provide a fantastic return on investment each and every year. When the returns don’t come in it is not time to listen to excuses but to take a second look at what you are doing and do your own homework. Investment need not be exotic in order to make money. Look for profitable investment alternatives in things that you know about. It makes the research easier. Look for intrinsic stock value, the predicted return on an investment over the years. Look for a margin of safety, the safety net that protects your investment during bad times. Often times picking sound investments is simply a matter of choosing among a number of dividend stocks and not a matter of finding good financial advisors.

Fundamentals, Fundamentals, Fundamentals

There are companies like Proctor and Gamble, Coca Cola, and 3M that sell things throughout the world. Their version of a bad year is to lose a few percent in stock value while still paying dividends. Their version of a good year is to pop up 30%. Smart stock investors never invest in a company unless they understand just how the company makes its money. Then these same investors only invest in stocks of companies that show the potential for a steady return on investment year after year after year. There are always profitable investment alternatives if you do your homework.

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Invest in Post War Syria through Its Historic Trading Partners

When the war ends in Syria people will need to eat. Refugees will return. There will likely be international aid on a large scale. However, Syria has trading partners. Turkey, Jordan, Lebanon, and Iraq all share borders with Syria. Syria has been, to a degree, a client state of Russia. It remains to be seen how much influence Russia will retain if the Syrian government falls without a peace agreement. Local trading partners will likely resume business with their old business partners in Syria. Manufacturers, wholesalers, and trucking companies in Turkey will benefit and will likely investing post war Syria by beefing up their operations at home or investing directly in Syria. The same applies to Iraq, Jordan, and Lebanon. We previously wrote about Three Good Offshore Investment Ideas in the Western Hemisphere. A fourth good idea might be to invest in post war Syria. NASDAQ carries a Turkish ETF that outperformed most others across the world in 2012. If peace breaks out on the nation’s borders it could further stimulate the Turkish economy and raise the value of Turkish stocks traded as ADR’s in the USA.

Who Wins and Who Loses in the Syrian Civil War

If you want to invest in post war Syria there are two caveats. One is the famous “blood in the streets” statement by Baron Rothschild from the 19th century. The best time to invest is when there is blood in the streets even if it is your own. When things are darkest is the best time to pick up deals. However, the second caveat is to know who will win and who will lose in the broader context if the Syria Civil War continues, if the government wins, or if the rebels win. The background for this conflict and for much of the Middle East is religious. The main branches of Islam are Sunni, Shia, Sufism, Kharijite, Ahmadiyya, and Quranism and there are successively smaller sects. The largest group is the Sunni followed by the Shia. Although the Shia branch comprises only ten percent of all Islam they are the majority in the countries of Iran and Iraq and are the largest Islamic group in Lebanon. Syria is 87% Muslim and 74% Sunni. However, the ruling party is Alawite Shia is only 13% of the population. From a religious standpoint it will be a loss for Iran, Iraq, and Lebanon it the Shia led government of Syria falls and a Sunni majority takes over. It remains to be seen how relations will fare based on religious affiliation but to the extent that religion dominates, picking sound investments in the area will probably have to do with picking local entities that understand the culture and business of the region and its people.

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Interest Only

Interest bearing investments are often the most secure. These include US Treasury bills, bank CD’s, and AAA rated corporate bonds. All of these vehicles provide a slow and steady return on invested capital and allow you to sleep soundly at night. In theory you only need to roll them over at maturity to keep earning. The drawback to these investments is that they often do not keep up with inflation. However, if one purchases Treasury bills or corporate bonds when interest rates are high it is possible to sell as interest rates fall. The value of the interest bearing vehicle rises as rates fall and one can gain a nice rate of return. To find practical investments in this realm remember to keep your bank deposits at less than $100,000, the limit of Federal Deposit Insurance.

Utility Dividend Stocks

An investment vehicle that mimics the rate of return on US Treasuries and corporate bonds is a dividend stock from a utility company. These tend to be secure investments with a potential for growth and their dividends tend to track current interest rates. When you seek to find practical investments in this area make sure to do fundamental analysis on the company in question to make sure that there are no surprises.

Things That You Know about and the Learning Curve

Many years ago in the late 1970’s the “hot” investment idea for those in high tax brackets was to buy and lease out railroad cars. The idea had its day and some folks made money while others had a less profitable experience. The sad thing is that many who invested in this vehicle were physicians acting on the advice of investment advisors or friends. During this time science invented the first medicine capable of reducing the secretion of stomach acid, Tagamet. This medicine sold like hotcakes and the stock of the company that made it rose substantially. Physicians, pharmacists, nurses all saw what was happening. The best investment for many would have been to invest in the maker of Tagamet. You can commonly find practical investments in things that you know about. This gives you an advantage of over other investors and reduces the amount of homework that you need to do to make smart investment decisions. Sound investment advice from someone whom you trust can be profitable. However, find practical investments instead of complicated ones and you will worry less and sleep better at night.

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How Is Declining Investment in China Divided Up These Days?

According to the Dow Jones press release, consumer services get the most venture capital. In 2012 there were fewer than a hundred deals representing $2 Billion in venture capital. The second largest recipient of venture capital in China is information technology which saw just over forty deals last year amounting to just over half a billion dollars. These two sectors led in the declining investment in China with roughly forty percent falls each from 2011.

Unlike the two top sectors, business and financial services investment rose by a couple of percent with around $450 million invested in twenty-seven deals.

Other sectors seeing a fall in investment are health care, utilities, and energy companies. These sectors in aggregate brought in just over $300 million in twenty deals. These sectors fell as a group by about forty percent.

Is This the End of the Ride?

Ever since President Nixon went to China and started opening the communist country up to the West, China has been on a growth spurt comparable to the economic growth of the United States after the US Civil War. The end result of the US growth spurt at the end of the 19th century was that the USA emerged as a world power. China has done the same thing. However, it is realistic to ask if perhaps the recently declining investment in China is a sign of a more generalized slowing. Certainly the balance of payments surpluses that China runs with many nations, most dramatically the USA, cannot be sustainable into the distant future. We have written about integrating China into the world economy on a more equitable footing and, from the US point of view, investing for a devalued dollar. Either declining investment in China will drive growth elsewhere, or the steady devaluation of the dollar and other currencies versus the Yuan will make manufacturing more profitable in the USA, as opposed to the Asian giant.

Declining Investment in China

No nation grows forever. As economic growth makes a nation more powerful its neighbors react. We are seeing that now with Chinese assertions of sovereignty over the South China Sea and the responses of the Philippines, Vietnam, Japan, and the rest. Who would have thought to see the US military having talks with the Vietnamese military over how to deal with China? Declining investment in China may simply be the first step in a more concerted effort to stem the advance of power and influence by mainland China.

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