Wednesday, September 30, 2015

Real Returns?

"To be uncertain is to be uncomfortable, but to be certain is to be ridiculous."

- Chinese Proverb

Welcome to The Golden Sense! You’d be hard pressed to find a grade school student who doesn’t recognize Jesse James as one of the most famous outlaws of all time. James and his gang, which included his brother Frank, robbed countless banks, trains and stage coaches throughout the Midwest in the mid-1800s and eluded capture for 15 years. What fewer people know perhaps is that it was their December, 1869 robbery of Gallatin, Missouri’s Daviess County Saving Association that brought notoriety to Jesse James. During that robbery Jesse shot and killed the bank’s cashier, John Sheets, whom he reportedly mistakenly believed to be the militia officer who had killed his buddy “Bloody” Bill Anderson a few years earlier in the Civil War. Eventually, in April 1882, Jesse was killed by Robert Ford (a newly recruited member of his gang). 

Times may not be as tough as in the Jesse James era from the mid 1800’s when people lived an average of about 40 years but they remain difficult nonetheless – particularly in saving and investing (PCBB, Brown).

Investors around the world are now faced with overpriced stocks; overpriced bonds, overpriced real estate, and well...overpriced everything.

The Economist cites a Deutsche Bank study pointing out that for 15 countries going back as far as 1800, the average prices of stocks, bonds, and residential real estate now stand at all-time highs. “Worse still,” writes the economist, “Deutsche Bank reckons the average real return from equities over the next ten years will be negative. The same is true for Treasury bonds, European corporate bonds and US residential property.”

So what are we supposed to do when saving and investing is so difficult? Sure, there will be some winners in future years, but to be certain of where those gains are going to come from is nothing short of a bet...a guess at best.

What the average person should do in an economy like this is to strategically diversify. If everything is overpriced, the most likely scenario is for things to correct and go down in the future. At this time it is best to strategically diversify your investments, your income type, your banking exposure, and your political jurisdiction. By doing this you will be strategically managing your risk in this uncertain environment.

The goal of diversification is not to boost performance—it won’t ensure gains or guarantee against losses but it will manage your exposure. Diversifying your investment portfolio is simple enough. Simply don't put all your eggs in one basket as they say. You'll want to spread your investments over different categories. This can easily be done by purchasing individual securities or  exchange traded funds (ETF's) which typically have low transaction costs. A well-diversified person would have exposure to stocks, bonds, gold, currencies, and real estate. Having diversification will help keep a balance in your portfolio through the ups and downs of the market. Unfortunately, you can't diversify yourself out of a financial hurricane so don't have grand thoughts of completely nullifying all risk. The expectation is that a diversified portfolio may provide the potential to improve your financial returns for the level of risk you are willing to tolerate.

It is also important to consider the income type in which your investment will provide. Investments will either yield a dividend or be sold for capital gains. By diversifying these type of investment incomes it will provide your portfolio with a balanced income stream. When the market is up, you will want to sell and gather your capital gains, and when the market is down you will be glad you owned those dividend paying stocks and those bonds yielding interest income.

I know this is a shocking statement; but not all banks are safe and secure. Banks around the world are exposed to a multitude of different risks. Some banks are not well capitalized or exposed to risky loans while others have plenty of capital and are managed appropriately. Sure there is FDIC insurance in U.S. banks, but during large financial crashes, such as 2008, the FDIC didn't have enough reserves to deal with all the bank failures. For instance, according to the FDIC's annual report, the commission has enough money in its insurance fund to cover just 1.01% of all the money in U.S. bank accounts (or about $1 for every $100 of yours). Just like with individual investment securities, the smart thing to do is bank with a few different institutions.

Diversifying into different political jurisdictions is concept most Americans do not normally think about. Yet, political and national risk is a very real threat. For example, the U.S. is financially bankrupt by their own admission. Just look up their financial reports on their website.

It’s also not surprising that insolvent nations run into major, game-changing problems. As Simon Black recently wrote: 

"Several of the United States major trust funds and institutions are already insolvent or quickly heading that way:

  • The United States Highway Fund is insolvent
  • The Disability Insurance Trust Fund of Social Security is scheduled to become insolvent within months.
  • The Pension Benefit Guarantee Corporation, a sort of FDIC for pension funds, is insolvent.

When push comes to shove the only options on the table for bankrupt nations will be default, confiscation, capital controls or massive inflation. Argentina did it in 2008… Portugal in 2010... France and Ireland in 2011… and Poland in 2013. Now Uncle Sam is finally starting to open up to the idea of nationalizing private citizens’ retirement accounts to pay the national debt. Most people don’t know this, but the U.S. Treasury has already raided the pension funds of government workers at least FOUR times since 2011 to plug federal spending deficits."

Holding funds or owning assets in different political jurisdiction is an intelligent thing to do. I am not saying disaster will strike tomorrow. What I am saying is that diversifying yourself financially across different political jurisdictions (countries) will help you weather a severe financial or political storm.

Jesse James certainly never thought about these topics. He lived in a simpler time. For all of us, the present day land scape is incredibly different. It is a complicated world with financial risks around every corner. The only thing we can do is set up camp accordingly.

Over and Out,

T. Norman