If you think that investing in times like these is difficult, you’re right. Recognising that these events happen regularly is a helpful step to sorting out your investment strategy. Do you simply wait for a lost decade to pass by before jumping into the stock market again? Is your money safe in a financial system with more than a quadrillion dollars’ worth of derivatives outstanding? Is your retirement dependent on government welfare in the midst of a sovereign debt crises?
You only have to ask yourself these kinds of questions occasionally. But when these times do come, if you have the discipline to carry out the right investment strategy you will be much better off.
But what sort of investment strategy do you use? What’s worked in the past?
Our regular haunt at the Daily Reckoning – gold – is top dog. But it’s also expensive these days. It would do well in a crisis, but it might not trend up like it has done over the last ten years. It’s still insurance against the fallibility of the political and financial system, but it doesn’t necessarily look like it has a good return baked in regardless.
So you should own some gold, but there may be better options when it comes to investing in the face of global instability.
Investment Strategy Number One
Australian Small-Cap Investigator (ASI) Kris Sayce likes to take big punts with small stakes. He reckons that certain stocks don’t really care about what the wider market or economy is doing. At least, that’s not what matters relative to the opportunity the stocks represent. Kris uncovers stories that could provide triple digit gains. Usually they involve some sort of creative destruction – where a new idea destroys an old industry or way of doing things and replaces it with something better.
The best thing about small cap speculation, apart from the returns, is that it’s a positive and hopeful experience. You don’t spend your time worrying about what the economy or ASX200 is doing. You spend your time anticipating and hoping for a whopping gain from a great business. That makes it fun.
It’s not a small-cap investor’s job to spend time lamenting the living standards of Europe. Because it doesn’t matter what Greece is doing when there are companies out there with disruptive technologies, resource opportunities and revolutionary business models – all of which add up to stock market gains.
This might be a pretty good strategy for part of your wealth in times like these. Even if you do care and worry about the big investment trends, why not try investing in assets that don’t rely on a growing economy?
Investment Strategy Number Two
Maybe you think you’ve got the world figured out. If you know exactly how the Eurozone mess will play out, how America will overcome its debt and how China will deal with its slowdown, you might want to invest in the assets that will benefit from your predictions. This is the world of macro investing. Exchange Traded Funds (ETFs) are a great weapon of choice for the macro investor. On the ASX you can find an agriculture ETF to profit from a global food shortage, currency ETFs to profit from currency wars, government bond ETFs to profit from falling interest rates, and emerging market ETFs to profit from the few booming economies left in the world.
It’s important to know the merits of ETF investing. There’s plenty of counterparty risk investing in this way. Can you be sure of what those ETFs are really up to?
Investment Strategy Number Three
If you’re sceptical about the world of finance and like things a little more clear cut, it might be a good idea to invest in the tangible things of the world – resources. Diggers and Drillers editor Dr. Alex Cowie uncovers the ASX’s best resource stocks. And many of them are aimed directly at defending against the economic trends of today – money printing and low interest rates. Recently, one of Alex’s tips was ‘the best performing stock on the market’ for the week. If you’re interested in tangible resource investments, Diggers and Drillers may be the place to start.
Remember, most companies sell an idea. A movie, fashionable clothes or financial services to make people richer… These ideas can disappear or change very quickly, along with the business selling them. But the likes of molybdenum and beryllium are very real. Not to mention copper, iron ore and so on. Investing in something tangible means stability in the face of instability. If the price of iron ore falls, is the iron ore changing or is the value of money changing? We’re not so sure about the answer, especially when central banks are willing to print money the way they do these days. But over the long term we’ll take the iron ore over paper money.
Investment Strategy Number Four
There’s one more strategy you should know about. Income investing is our favourite way of dealing with a dodgy economic environment and the poor capital gains that go with it. In the long run, it’s by far the most reliable and profitable investment strategy. But it’s got some major short term drawbacks. First of all, it’s not very sexy. The payoffs take a long time to appear.
But when they do, they are very sexy. At the After America conference we gave listeners a quick example of a way to generate 4000% dividends – turning a $10,000 investment into a $400,000 annual income stream after 15 years of patience. The example was based on a real stock and its real historical performance. But slightly more realistic assumptions for the same stock’s next 15 years came out at a 100% dividend, returning $10,000 each year to the patient buyer. Imagine raking in predictable triple digit returns every year, while your friends manage it only occasionally, when they’re lucky.
But which stocks could possibly hand out that kind of performance? We’re narrowing down our shortlist. We’ll keep you posted.
Contributing Editor, Money Morning
Publisher’s Note: This is an extract from an article that originally appeared in The Daily Reckoning Australia.
From the Archives…
How Bad Monetary Policy Will End the Welfare State
2012-06-01 – Dan Denning
The Setting Sun of the Japanese Economy
2012-05-31 – Greg Canavan
The US Dollar – The “Strongest of the Weak”
2012-05-30 – Kris Sayce
Europe’s Energy Resource Puzzle
2012-05-29 – Kris Sayce
The Market Has Crashed, But This Graphite Stock Has More Than Doubled
2012-05-28 – Dr. Alex Cowie
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Written by Nick Hubble
Nick Hubble is feature Editor of The Daily Reckoning Australia – weekend edition. Nick has spent the last three years discovering lots of new, exciting and surprisingly simple ways to generate money for retirement. He’s put all these ideas into his investment publication The Money for Life Letter.
If you’re already a subscriber to these publications, or want to follow Nick’s financial world view more closely, then we recommend you join him on Google+. It’s where he shares investment research, commentary and ideas that he can’t always fit into his regular Daily Reckoning emails.