Some weeks there is so much going on in the stock and bond markets that it is like being a kid in a candy store. The place is just chockfull of wonderful looking offerings, probably all of them really good. But, mom said all you could have was one or two pieces, otherwise you might just get a tummy ache.
Looking back, I always wondered if I really would have gotten that tummy ache, and I wonder what fun it might have been to try and see. I am sure even 10 or 12 pieces would have been a heavenly adventure. Oh, well, like those days, I can only pick one or two topics each week to include in my column, so I try to pick out the ones that will be the most benefit to all of my readers.
This week, I want to focus on two areas of importance and immediate relevance to your portfolio and your pocket book, the Fed and gold. I could write a book about each one, I am sure, but I will boil it down to just the cogent facts and summarize for you why these two topics are going to have a big impact on your future investment success and how you might fight back.
First, let's turn our attention to the Federal Reserve. I have told you before of the history of this institution and how Congress in 1913 chose to follow the advice of J.P. Morgan to try to save its hide from angry voters — all men in those days, by the way.
The financial panic of 1907 had left a deep and ugly imprint on the economic psyche of the business world. It had been a near meltdown of the U.S. financial system. At that time, only J.P. Morgan summoning all the New York bankers — the real power of the U.S. banking system in those days — and literally locking them in his board room until they all agreed to his rescue plan, ended the severe panic being felt throughout the land.
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But, the lesson was learned and pressure arose to do something at the federal government level to try and head off such panics developing again. The present day Federal Reserve was the outcome. Today, it is a quite different animal than it was in those early days, having been re-worked by Congress a number of times, including an extensive re-work in the 1930s to address the pressures of the Depression. But, however much it has been re-worked, today its vast power still greatly affects your pocketbook.
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The current Chairman of the Federal Reserve is Dr. Benjamin Bernanke, an academic and expert on the Federal Reserve System, as his several major books on the subject attest. You have seen the power of the Fed in the last three-to-four months by the world's reaction to the lowering of interest rates by Bernanke and the Fed Board of Governors. It was gigantic, not just in the U.S. but all around the world. For despite the common impression in the media, the Fed wields huge powers over the economic activity of the entire world banking system. When the Fed raises or lowers rates, everybody feels it.
You have already felt it in your pocketbook if you have just taken out a mortgage or have any loans with rates that float subject to the "prevailing interest rates" posted by the Federal Reserve and more recently in the last 25 years by London's so-called "Libor" rates as published in the Wall Street Journal. Businesses felt it at once, too, as it immediately lowered their cost of doing business and encourages them to borrow to support and expand their business activities.
So much for the history lesson. Now, what can you do to protect your portfolio dollars in light of the coming Fed's actions during the next six to 12 months, which will likely include even lower interest rates than those of today? First, you must realize that cash flow from interest bearing investments you own will be less. That is something you have no control over. However, you do have control of where you put your money to help protect your portfolio dollars and increase the cash flow you receive.
But, first you need a plan, one that will ensure that at least you do something pro-active to help. Just "sitting it out" is not a plan. It is a sure sentence for losing valuable purchasing power. So, here is a plan for you to consider.
First, separate your portfolio into two sections.
The first section is that money principal that is to be used to preserve, in a fixed number of dollars in your portfolio, the so-called "bedrock" portfolio dollars that must not be exposed to any "actual dollar value" reduction risk.
The second section is to be used to try and make up for the reduced income from lower interest rates you are now receiving and from that much more "invisible" thief of purchasing power, the loss that inflation can visit upon your portfolio. Now understand that this section will be open to risk. Without risk to at least part of your portfolio, you will have no chance of making up for the current loss of purchasing power that you are already suffering.
Now, if after reviewing your portfolio, you determine that all of your funds represent "bedrock" funds, I suggest that you go to the Internet and find those banks that offer the very highest three-to-five year CD rates and put your money there. Be sure they are FDIC guaranteed, of course, but from my own personal experience, you will find as much as 1/2-3/4 percent better rates by shopping around on the internet. Do not go out further than three-to-five years, as rates may go up again in that time and you will not want to be tied up in a rate that, at that time, may not be the best you can find. For your needs, this is as much recommendation as you need from me.
Now, for those of you who do have a portion of funds that fall into the second category, here is a plan that should help you preserve and build purchasing power that might be otherwise lost to lower rates and inflation losses.
First, separate the funds into four amounts, three that are income producers and one that is not. The first three income producers are called:
"Conservative risk" — low risk loss level in the 5 percent to 8 percent area
"Middle risk" — might expose you to a loss of 10 percent to 20 percent if things do not work out as you hope
"High risk" — where loss might be as much as 25 percent to 40 percent if things do not work out well.
The fourth and final group is for investing in gold, but I will cover that more at the end of this column.
Here is how the conservative risk money should be invested. Use what is called a "balanced" mutual fund. The rules are these:
Select only a no-load fund
Use no fund that has less than a 40-year history
Select no fund that is less than $20 billion in size
Select no fund that has an expense ratio higher than 1.35 percent
Select no fund that has less than a 12 percent per year average return over the last five years
Use the Morningstar rating system and select no fund with less than a four-star rating.
You can also use the Value Line system, as I have no special preference here. But, select a Value Line fund that has a rating roughly equal to the Morningstar four-star rating. Put your conservative money here. A list of these funds can most easily be found by typing in "balanced mutual funds" in a good web browser. I use Google, but use the one with which you are most familiar.
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And here is how your middle risk money should be allocated. Again, using the same procedure above:
Use only no-load funds
No fund with less than a 25-year history
Use only funds with at least $10 billion under management
Select funds with less than a 1.55 percent expense ratio
Select no fund that has less than a 15 percent per year average return over the last five years
Using Morningstar or Value Line, select funds that have at least a four-star rating. Put your middle risk money here. I would enter "growth funds" in your browser window.
All your high risk funds should go directly into an ETF or several ETFs that represent foreign growth markets like South Korea, China, Brazil, or Singapore. You can select other markets, but be sure that you have some feel for the country before making your choice. These are my favorite choices. Your expense costs will be very low for these ETF funds, generally less than the 0.8 percent area, so that is not a concern here.
A second area of ETF investment would be health care ETFs, and a third would be ETFs that represent the U.S. defense industry. I would not go outside these areas at this point, as they represent, in my opinion, the place where most of the U.S. and foreign money is going. The reason is simple. They represent the top three world growth markets.
And now for the final portion, we come to gold, that yellow substance that humanity, for reasons we will never really know, selected since recorded history to represent the most valuable of all substances. I have never figured out why, unless you want to call scarcity the reason. But, if that is the reason, why didn't they pick whales teeth, or jade, or some such rare substance rather than gold? Oh well, figure that one yourself.
All I know is that gold is the universally accepted "currency" everywhere. I suggest that you put your gold portion into the stock listed on the NYSE under the symbol GLD, the StreetTracks Gold Trust ETF. It is a way to easily directly own real gold and have almost instant ability to buy and sell it. For every share you buy, the fund buys actual gold to hold for you.
Now, why buy gold? That too is simple. As paper currencies experience inflation, even if it is only 2 percent to 3 percent a year (we clearly have more than that today), your purchasing power erodes. Gold is the only investment that directly and against every other investment out there increases in price. As long as the world is seeing inflation, gold will be your best bet to retain purchasing power over the long haul.
So that you have some idea of what I expect, here is my prediction for gold prices over the next three to five years. In 1974, President Nixon revoked the gold standard because France wanted all current account balances owed to France paid in gold. Not good, said Nixon. Gold was valued at $35 an ounce at the time, as set in the 1930s when all gold was confiscated by the U.S. government. But, that is another story.
Anyway, gold went to nearly $900 dollars by the late 1970s. That is a near 30-time growth record! But, be aware that gold then fell to as low as the mid-$200 level by the late 1990s. The decrease was linked to manipulation some say, but regardless of how it happened, it did fall. Be aware there is risk in gold, too. But, in my estimation, as long as inflation and huge deficits are being incurred by most world economies, gold will be king.
Now, as to my expectations. I look for gold to move to the $2,000 level in the next three-to-five years. That will only be a 10-time move from the late 1990s level. We are already at a near five times increase, so I expect we still have a long way to go. I might even suggest a possible 15-time move, both estimates being far less than the huge 30-time move in the 1970s that I told you about above.
The 10-time move equates to a $2,000 price per ounce for gold. Doubt it? So did the investors when gold was at $35 in the early 1970s. See what it got them. And today, who would have believed over $100 barrel oil back in 1999 when it was under $9.50 a barrel or even in 2002 when I was only $16.65 a barrel! You better believe in the possibility of $2,000 gold, at least, and quite possibly even a 15-time move to the $3,000 per ounce level.
Well, there you have it for this week. I have tried to give you a bare-bones road map that will help you meet the current demands being placed on your portfolio. I hope you found it helpful. Not sure what next week's topic might be, but like being in the candy store, there are just so many, many fascinating ones to chose from, I am sure it will be one that will be of current interest to you and will help make you money. Such are my goals for you every week.
For those of you who want me to do all the work for you — hey I can't blame you one bit — and want my latest, buy/sell recommendations on the best high yield income investments from around the world, I recommend you sign up for my brand new newsletter called Max Whitmore's High Yield Income Investing. For a special offer exclusively for readers of this column, Go here now.
Do hope you have a good investment week. In the meantime, you keep in touch I do! See you next week.
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