|Investment themes for 2011
Monday, December 20, 2010
This past year proved to be a decent year for most investors.
The question now is, “How can you boost investment returns in
the current low interest environment?”
An aftermath of the 2008-09 credit crisis is a very low interest
rate environment with no end in sight. Investors have suffered
through a very poor decade of returns for the most part, and
this has in turn led many investors into fixed-income and balanced
investments. While these investments are definitely safer than
equities and other more volatile investment vehicles, most of
them are also not returning much once inflation and taxation
are factored in.
Most of us, and especially those without a defined benefit
pension plan, need our investments to generate decent returns,
or our retirement lifestyle may suffer as a result. The million-dollar
question is how can we do it without taking too many risks?
Here are a few ideas that may be help you achieve better returns.
From a defensive standpoint, I’d avoid taking too heavy a position
in Europe for the next couple of years. The sovereign debt problems
in the eurozone peripheral nations Portugal, Italy, Ireland,
Greece and Spain (collectively know as the PIIGS) are far from
over. Greece was the first to face questions about its ability
to pay government debt, until the European Union set up a bailout
fund, funded mostly by Germany and France, to quell the storm.
Much of the sovereign debt comes due in 2011, so we will get
a better picture of how Europe will manage that issue. Some
European countries have already made plans to reduce government
payrolls, increase the retirement age for benefits, and other
fiscal decisions that won’t help economies in the short run.
Decreased consumption will also negatively affect companies
that do business in Europe.
The United States
Too many problems in the U.S. these days, and none are close
to being resolved in the next three to five years. Government
and consumer debt are far too high. This will help keep consumption
lower than normal as balance sheets are repaired. The U.S. does
have the capacity to raise more money through taxation, but
raising taxes in the U.S. is always difficult, even more so
with the economy still struggling and elections in the not so
distant future. Many U.S. companies are now global companies,
so decreases in domestic earnings will be offset by increases
in emerging markets.
As with Europe, from a defensive standpoint, I wouldn’t have
too much U.S. exposure.
The problem now is that most fixed-income returns aren’t great,
and with reduced exposure to the U.S. and Europe, where can
you move some money or add to a position in order to have a
decent opportunity for growth. I think the answer is to have
some assets invested where most of the world’s growth is occurring
and is likely to continue: Emerging economies.
Emerging nations carried the world out of the last recession,
when Western economies were sluggish and drowning in the credit
crisis. For the most part, they avoided the credit crisis, not
because they have better banking systems than developed nations
do, but mostly because their banking systems are less well developed.
Consumers didn’t have the same access to mortgages or credit,
which was where the crisis originated.
Natural resources are another way to capitalize
on the emerging markets’ thirst for energy, while still dealing
with stable Western companies. Many of funds in this sector
have produced 15%-20% annual compounded growth on a 10-year
basis, even though many dropped close to 50% in 2008.
Precious metals are another way to diversify
your portfolio. The euro may be in trouble owing to sovereign
debt problems and falling consumption. Some countries many even
attempt to exit the eurozone and go back to their old currency
to give them greater control over their economies. That would
make the euro very unstable in the short term. Where do countries
with huge cash reserves, like China and Russia, go for safety?
The U.S. economy is also in trouble, so the greenback may not
be the answer. Some of these countries will increase gold holdings
to diversify and to hedge against falling euro and U.S. dollar.
The world has changed a great deal in the last decade, and
economic power has definitely moved east, away from the US and
the Western world in general. The growth rates of the developed
Western economies are slowing, and populations are aging quickly.
The emerging markets have rapidly growing economies and younger
populations. As investors, we have to recognize this paradigm
shift and invest accordingly.
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Commissions, trailing commissions, management fees and expenses
all may be associated with mutual fund investments. Please read the
simplified prospectus before investing. Mutual funds are not
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no assurances that the fund will be able to maintain its net asset
value per security at a constant amount or that the full amount of
your investment in the fund will be returned to you. Fund values
change frequently and past performance may not be repeated.
Personal Opinions & Recommendations Disclaimer
The foregoing is for general information purposes only and is the
opinion of the writer. This information is not intended to provide
specific personalized advice including, without limitation,
investment, financial, legal, accounting or tax advice. However,
please call the author to discuss your particular circumstances.