An understanding of the current economic realities and trends suggest that it is imperative that you take steps now to prepare for the economic storm that’s coming & identify which safe haven investment alternatives you should invest in to actually prosper in the years ahead. This article does just that.
By Arnaldo Paulini – www.munKNEE.com
Below I outline:
- the economic storm you are about to experience,
- how best to prepare yourself to withstand the expected hurricane winds, high seas and torrential downpours and
- identify which safe haven investment alternatives will ride out the storm of the century in fine fashion allowing you to actually prosper in the years ahead.
Economic Realities That Will Adversely Affect Your Approach to Investing
- Increased Volatility: The period ahead will be marked by much uncertainty and increasing anxiety in terms of economic direction which will lead to dramatic volatility in the financial markets.
- Lower Asset Prices: Asset prices generally, but not commodities, are expected to continue to drift lower.
- Higher Interest Rates: While interest rates are currently at multi-decade lows, they will not remain there indefinitely. The inevitable rise in interest rates will become the trigger for a variety of new financial and economic crises affecting both governments and the private sector.
- Bursting Asset Bubbles: Record low interest rates initiated and imposed by central bank policy has led to easy credit, borrowing and excessive leverage. The consequences are serious disruptions in the broader economy starting with the financial sector and now the government sector with its unprecedented deficits and debt. The unprecedented magnitude of credit, lending, borrowing and leverage has all been the negative hallmarks of the current bubble economy.
- Continuing Debt Crises: Financial sector debt, personal debt and sovereign/government debt have become universal realities for which the consequences are still only partially visible. They also continue to grow. Nations experiencing the greatest financial stress are mature advanced economies which include the United States and much of the EU and Euro zone of western Europe and Japan. Excessive borrowing, government deficits, debt and future unfunded liabilities dominate their financial landscape.
- Slower GDP Growth: Most developed nations are incapable of growing and taxing their economies sufficiently to avoid future debt default, dramatic currency devaluation, monetary inflation, debt monetization and price inflation leading to various forms of insolvency.
How to Prepare for Such an Investing Environment
- Pay off debt: get liquid and save.
- Don’t buy on credit: unless the rate is locked-in for the long term.
- Don’t “buy and hold”: such advice was common among investment counselors over the past many years – but times have changed.
- Avoid high fee investments: too much of your equity and profits will evaporate buying investments with heavy purchase and/or sales fees, and particularly ongoing management/administration charges. Consider sector ETF’s (Exchange Traded Funds) as an economical replacement, but which share certain of the advantages of mutual funds and regular market traded stocks.
- Consider discount online brokers: an economical alternative to full service brokers for the purchase and sale of securities and ETF’s.
- Don’t make frequent buy and sell transactions: trading and speculating is best left to knowledgeable and experienced professionals.
- Keep informed: read extensively, ask questions of persons without vested interests in the sale of financial products, and resist the hype of the popular financial media.
Where to Consider Investing
Consider investing in:
- securities other than fixed income/fixed interest rate investments such as bonds, financial institution CD’s and money market funds. Higher interest rates lie ahead (in fact they are guaranteed!) which will invariably cause the price of one’s current fixed income investments to plummet. Contrary to popular opinion, one can lose equity on government and investment grade corporate bonds in a rising interest rate environment, especially on those bonds with longer dated maturities.
- securities/assets denominated in more than one currency. The ramifications of currency devaluation brought about by excessive money printing (i.e. quantitative easing/debt monetization) will otherwise indirectly lead to a reduction in the value of your investments.
- stocks of companies with a large percentage of their income derived from emerging markets to hedge against currency devaluation as well as from dislocations in the economic and financial markets of your own country.
- securities and assets denominated in currencies other than the U.S. dollar. It will become increasingly dangerous to one’s financial health in the future to continue to place all one’s investment eggs in the U.S. basket. An exception is to invest in American companies which obtain a majority of their income from business activities in foreign countries and emerging markets (Warren Buffett frequently advocates asset diversification of this kind).
- select investments abroad before further restrictive barriers to the movement of your money are erected.
- emerging markets in order to achieve a more balanced investment portfolio.
- resource-based nations of the developed world.
- natural resources.
- the energy sector.
- the primary agricultural grains of rice, wheat, corn and soybeans along with their processors and distributors, fertilizer manufacturers, seed and chemical suppliers as well as machinery suppliers.
- minerals, especially base metals, which are absolutely necessary in order to develop massive public infrastructure and products for the rapidly developing world with 6.5 billion growing population.
- precious metals. Not only is global population growth continuing unabated, people in emerging markets are rapidly entering the middle class from basic standards of living. Elevated demand for quantity and quality of life’s amenities beyond basic needs will fuel much added demand for basic materials and resources needed for manufacturing in order to satisfy growing middle class needs and wants. Precious metals, especially Gold and Silver, have industrial applications as well as being stores of value/money…especially gold.
With paper/fiat currencies susceptible to rapid devaluation caused by rampant and out of control ‘money’ creation by their respective governments, ‘tangibles’ of all kinds, including natural resources and real estate, are preferred investments in this type of environment.
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