With a sluggish economy, it is difficult to find good investments. Your focus will have to switch from return on capital to return of capital.
I am not an investment advisor, and I have no idea where the market is going next week or next month. However, if you believe we are in the middle of a long term secular bear market, below are some suggestions to help you preserve your wealth.
These are the stages in a typical investment cycle. I believe we are generally in Stage 3, but Fed policy is manipulating the normal economic cycle.
1. Stocks - Low interest rates and economic growth means stocks are the place to be. Stocks eventually reach a level of valuation that cannot be maintained. It requires an ever increasing money supply and debt burden to support stock valuations at the end of this stage.
2. Cash - After the bubble bursts, the bankruptcies kick in, which is deflationary. Cash is king during deflation.
3. Hard assets (gold) - The Government tries to re-inflate. This causes inflation and eventually higher interest rates. Gold is an excellent investment here.
4. Bonds - As interest rates finally peak, long term bonds offer the best return.
5. As interest rates drop, it is time for stocks again.
Stage 2 was never allowed to fully develop. Before there were enough bankruptcies to reduce the debt bubble, Bush offered a massive stimulus through 2 wars, tax cuts, and big government spending. Even though Obama promised change, his strategy has been to massively outspend Bush while making America less competitive in the world market, further eroding our ability to service the debt he has created. There are 2 ways to reduce debt: bankruptcy and inflation. The Government and the Federal Reserve have obviously chosen inflation.
I believe that the key to long term investing to concentrate your investments in the sector that is in the bull market phase of the long term cycle. During a long term bear market, the most important thing is preservation of wealth.
Here are my recommendations:
1. The Sector Dogs Rotation Strategy. This is an investment strategy that I have set up on the Motif Investing brokerage site. It is a strategy to beat what will likely be a stagnant U.S. stock market.
2. Physical gold - Physical gold is a conservative hedge against inflation and a declining Dollar. It is now possible to buy physical gold in an ETF just like a stock. The symbol is GLD.
3. International bonds - International bond funds can yield more than U.S. bond funds and offer some protection from a falling Dollar. The dangers are rising interest rates and a debt crisis. Some ETFs worth considering are EHI, AWF, EMD, and ESD.
4. Municipal bonds - Municipal bonds pay tax free interest, which is helpful in a taxable account. A little leverage helps boost the yield. My favorite leveraged municipal bond ETF is MFL.
5. International stocks - There will be successful economies somewhere in the world during these difficult times. If you identify a country with favorable growth prospects, investing in it will have the added advantage of acting as a hedge against the Dollar. Some international ETFs worth considering are RSX - Russia Large Cap, RSXJ - Russia Mid/Small Cap, FXI - China Large Cap, and ILF - Latin America Large Cap.
6. Leveraged mortgage REIT funds - Leveraged mortgage REITs pay good yields, but they do poorly when interest rates increase. Some mortgage REITs worth considering are AGNC, NLY, WMC, and MORL (super leveraged).
Here are some investments that I do NOT recommend:
1. Cash - The Vanguard money market fund pays a very low rate. Unfortunately, this is not enough return to keep up with inflation.
2. Short term high quality bonds, TIPS (Treasury Inflation Protected Securities), and CDs - The Vanguard short term bond fund has a yield barely above the money market, and there is some risk if interest rates increase. TIPS offer some protection against inflation, but the yield is not much better than the than the money market. An insured EverBank CD also offers a yield just slightly better than the money market. All these options will slowly lose value over time due to inflation.
3. Gold stocks - Gold stocks are much more risky than gold bullion because the cost of mining tends to go up with inflation. This can make profits elusive even as the price of gold rises. If you are interested in gold stocks, be aware that individual gold stocks are extremely volatile. A better choice for most people might be the gold stock ETF, GDX.
4. Short market - The danger in long term shorting is that inflation can make the short lose money even though the inflation adjusted value of stocks is declining. If you must short the market, the best way is to directly short an ETF of a major index (SPY, DIA, QQQ). Stay away from inverse funds or ETFs because they have too much slippage in relation to the index they are supposed to inversely track. Even the Rydex Ursa fund (RYURX) has shown significant slippage over the last few years. I recommend all but the most nimble market timers stay away from options or funds that use options for leverage. The time erosion, volatility premium, spreads, and commissions all work against you when you buy options.
Rydex Ursa and Bear ProFund compared to S&P 500
If you follow these recommendations, you should be able to preserve your wealth by beating inflation.
Disclaimer: Fred's Intelligent Bear Site provides this information for your interest; however, you are ultimately responsible for decisions on where to put or move your money. This site is not liable for any decisions you make. This site is presented "as is" and may contain inaccurate information. This site is not maintained by an investment professional.