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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.

Potential solutions

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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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.