You need to stay in markets despite an impending economic collapse. [Really?! Yes, really.] Normally such an expectation would be addressed by getting out of the way of the oncoming disaster and taking ones chips off the table [but,] in this situation, there is no place to hide. Low-risk assets, like bonds and near-cash, produce little to no return…and the threat of rising interest rates and inflation make them dangerous. Higher risk assets are unavoidable, given current conditions. [Let me explain further.] Words: 830
So writes “Monty Pelerin” (economicnoise.com) in edited excerpts from his original article* entitled The Investor’s Dilemma.
This article is presented compliments of www.munKNEE.com (Your Key to Making Money!) and may have been edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
Pelerin goes on to say in further edited excerpts:
The investment world has changed. Unless you recognize this fact and adjust your investing accordingly, your results will be disappointing. Investors must become less long-term oriented and behave more like traders. The belief that tomorrow will be better than today no longer holds, and this former reality was the basis for buy and hold investing. Without this condition, buy and hold investing makes no sense.
Portfolio re-balancing, based on a rotational Exchange Traded Fund strategy, is a reasonable approach in this changed world. The strategy can be utilized in regular stock market accounts although Individual Retirement Accounts (IRAs) provide a better vehicle to the degree that paperwork and tax consequences matter.
For long-term investors, regular trading is uncomfortable. It goes against the time-honored investment principles defined by Ben Graham and turns investors toward short-term trading. Despite the discomfort, not recognizing and reacting to new economic and political realities will likely cause greater discomfort.
Change in Markets
Economic considerations play less of a role in investment outcomes today than in prior times. Politics has taken on unfortunate importance, especially in the short-run where changes in government policies produce substantial market effects. For better or worse, the nature of the economy, government’s role in it, and the likelihood of a coming major, disrupting event are with us. Investors must adapt and overcome by changing their approach to investing.
The world is moving toward an economic and financial collapse. The damage already done to economies is irreparable, making a worldwide Depression inevitable. The political class continues to do everything it can to avoid the unavoidable. They can defer the event, but only at the cost of greater pain and adjustments later. From a political standpoint that may be desirable, but it is absurd economics.
Normally such an expectation would be addressed by getting out of the way of the oncoming disaster and taking ones chips off the table. In this situation, there is no place to hide. Low-risk assets, like bonds and near-cash, produce little to no return as a result of Federal Reserve policies. The threat of rising interest rates and inflation make them dangerous. Higher risk assets are unavoidable, given current conditions.
Two considerations reinforce the need to stay in risk assets:
- The timing of the coming event is unknown.
- The path to the coming event is also unknown.
A collapse is likely to come soon (within the next five years), although timing is difficult to predict. No Japanese pundit foresaw the complete collapse of their stock market nor did any “expert” anticipate that their market would not recover. It is still down 75% from its highs two decades later.
Massive deflation or inflation is possible. Either will trigger an economic collapse. Government interventions, particularly in the monetary arena, point to inflation. However, unsustainable levels of private and public debt could collapse in spite of government efforts to prevent that. The path that leads us into Depression is important because of its impact on investments.
If inflation occurs, stocks should do better than cash and/or bonds. If deflation occurs then cash and bonds should outperform stocks. Withdrawing from markets works well if deflation leads. However, if you do so and inflation occurs, you are poorer when the Depression takes hold. The opportunity cost of not being in stocks if inflation develops is severe. Plus, the real value of bonds and cash will decline.
If inflation occurs, stocks may perform well for a while. Eventually inflation will result in an economic slowdown which turns into a collapse. Staying in the stock market too long then becomes painful.
Here is the conundrum: preparing too early or preparing for the wrong path will leave you poorer entering the Depression. Welcome to the brave new wonderful world of government interventions and their immediate and long-term effects on markets and the economy.
Momentum investing has the advantage of automatically re-orienting your investments toward sectors that are performing well and away from those performing poorly. It is a mechanical method that removes much of the emotion from investing. Allocations change frequently. You are not wedded to preconceived notions and allow market movements to dictate your portfolio allocations. There is no reason to waste time looking for “undervalued” stocks (a conclusion that holds in normal markets). Markets tell you where to invest rather than your trying to outguess them.
Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
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