My older son just turned 40. He has three kids and an excellent, well paying job with the Federal Government. For the last 10 or 12 years he has been putting 5% of his salary into an IRA, matched dollar for dollar by the Feds. Until about 2 years ago he had been putting 25% each into the Gov't Securities Fund and the Fixed Income Fund and 50% in the Common Stock Index Investment Fund. At that time I advised him to be more conservative, and put only 25% into the Common Stock fund, and the rest in the other two, more conservative funds. He did that, and is happy now that he did.
Tonight I advised him differently. I said, "Get out of common stocks altogether. We are now entering an era where the rules of the game have changed....It used to be,---how can I invest prudently and make a good buck on my money. Now you must think, what must I do simply to preserve my capital....making money is for another day. Just maintaining your wealth is the challenge for today and tomorrow."
I told him that I believed that there is a greater degree of uncertainty and danger today than at any time in the prior 40 years that I have been investing. He asked for just a couple of key reasons why I felt this way and I told him (1) it is unclear how the war in Iraq will proceed and what will follow, (2) another terrorist attack on the United States was possible, if not probable, and (3) the continuing escalation of both personal and governmental debt in America would be unlikely to resolve painlessly. At the very best we are in for a long and difficult period ahead, with a possible (probable?) further downward slide of the economy.
He asked me how I was invested. I told that my Defered Compensation Plan with NYS was all in the "Stable Income Fund", and the my equity investments are no longer aggressive (as they have generally been), but all instead in commodity-related companies, and a little in Gold Funds. I told him all about NG, and how that is my favorite investment of the moment, because certain commodities, like NG, are integral to our way of life no matter how bad conditions get. He asked me if I was making any money on my NG equities (since I had told him a few months ago that I expected to make lots of money in my NG investments). I had to confess to him that although I hold some terrific NG companies that have impressive and growing earnings, so far (4 mos.) I have made only ~5-8%. And my son said, but in this period, my Common Stock Mutual Fund has gone down some 15%. Probably, Dad, you need to look at your investment in NG relative to the world around you, and, as you have just said to me, this is a time when the name of the game is not to make money, but just to preserve your wealth. Tomorrow we will try to make money again.....
I totally agree that we are in a time where capital preservation should be the key to one's current investment strategy. And there is only vehicle that's fits the bill like no others. Totally unique and as close to 100% safe as investment can be.
What is it? TIPS (Treasury Inflation Protected Securities). These provide the only real protection against the ravages that inflation in incur.
No other investment provides the protection that these do. I've owned a very large position of them for a few years now and they have performed incredibly well even in the low inflation environment that currently exists.
> TIPS (Treasury Inflation Protected Securities). These provide the only real protection against the ravages that inflation in incur.
The only problem is that the yield is linked to the consumer price index produced by the Bureau of Labor and Statistics. There is a good deal of evidence that the CPI commodity basket seriously underestimates actual price inflation, due to unrepresentative baskets, chain-weighting, hedonic price deflators, and other statistical manipulation. Consider the dramatic rise in energy, housing, and healthcare costs over the past few years. Indeed, the only sector that hasn't seen price inflation far in excess of the BLS CPI index are manufactured goods that compete with East Asian imports.
As you might imagine, there are some very good reasons for the Fed to understate inflation. Lower borrowing costs, entitlement & salary increases, and foreign exchange rate manipulation among them.
Here's some info on the kinds of manipulation the BLS does:
Unless you put ALL of your funds in TIPS, you still want an investment that offers returns GREATER than the CPI, to hedge the portion of the portfolio that underperforms. As far as I know, only precious metals, and raw commodity related securities fills the role.
TIPS are very useful as part of an overall investment strategy; but, they are still debt instruments; I do not believe the Ibbotsen numbers will be repudiated; we are not Japan; I believe equities are still a very necessary component of an asset allocation mix; the % will depend on age and risk tolerence; the breakout in gold is a concern to me; I'm dusting off my Von Mises books again; but in the meantime, buy vpi!
We were in a huge bubble. The reprecussions will last at least as long as the bubble took to inflate, probably longer...see Japan...see 1929. I think you gave your son excellent advice. For confirmation, have your son go to the PIMCO website and review Bill Gross's November? and February comments ( since he runs the country's largest mutual fund maybe we should pay attention to him). Take comfort the the advice you give is correct because Warren Buffett doesn't see much value at these prices either. Nor Sir John Templeton. Nor Robert Shiller, Yale economist, author of Irrational Exuberance...speaking of which...we are still above the S&P valuation where Alan Greenspan pronounced the market irrationallly exuberant 6 years ago!!!! Plus as you properly point out Iraq, terrorism,... add pensions deficits, state gov'y deficits, airplane lease fiascos, telecom dark fiber...yikes..China/deflation. Stay low, cash will provide opportunities. Let's hope we are wrong..it will be a better life for our families...good luck.