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I've had two separate people contact me this week. Both have come into large cash sums and don't know what to do with the money.
Their instincts tell them that they shouldn't be sitting in cash – low interest rates are a big deterrent – so what should they do?
I thought I'd use today's Money Morning to give them a bit of 'big picture' advice – which will hopefully be of use to you too...
The 'buy-and-hold' strategy is dead
Most investors are not full-time traders. They want to find an investment for their money, park it there and then get on with the rest of their lives, sleeping comfortably at night in the knowledge that they can come back in a few years to see their money has safely grown.
The problem is that this 'buy-and-hold' strategy is dead.
Back in the '80s or '90s (as long as it wasn't autumn 1987), you could just buy stocks, go round the world and come back in a few years to find your investment had doubled or more.
But since 2001 the stock market has collapsed, rallied and collapsed again. If you happened to buy in late 2002 and sell in late 2007, you'd be sitting pretty, but for most people stocks have been a rotten investment. You'd be doing well to be at break-even. Buy-and-hold just hasn't worked. It's been a traders' market - a flippers' market even.
It's the same story with real estate. To buy in the '90s or early '00s and hold was about the best investment you could make. Even those who bought in the late '80s and managed to hold through the downturn were mostly well in the black by 2000. Hence the 'house-prices-only-ever-go-up' mentality that blinkered the country.
The secret was to be out of property by 2007. Now real estate too is in a bear market that I don't believe has yet bottomed – in fact I think there is another big leg down coming – and the only way to make money has been to buy at well below market value and flip. But that is a very dangerous game.
Government bonds have been in a bull market since they early '80s and have been another great buy-and-hold. But it would appear that they too reached a secular peak - in December 2008. Given the wanton attitude of the Federal Reserve, the Bank of England and their respective governments towards bail-outs, deficit spending and money printing, would you seriously want to be a buyer of their bonds or gilts?
Is it too late to get into gold?
In fact, with the possible exception of oil, the only buy-and-hold investment of the last ten years has been gold. But is it too late to come to the party? The chart below from Sharelynx shows gold in sterling over the last ten years.
I must confess that this chart leaves me – as regular readers will know, a proper goldbug – feeling rather jittery. It's a bit too 'vertical' for my liking and it has a long way to fall, if it wants to. We peaked at £700 an ounce in February this year and have been in a downtrend ever since. The action I would like to see is to find a low somewhere between £500 and £550 an ounce, consolidate there for a few months and then begin the next step up. But a break of £500 or £450 would leave me seriously considering the exit.
I was listening to Smooth FM yesterday and heard an advert for physical gold. That was a wake-up call: adverts for gold on commercial radio. That tells me we are no longer in the 'stealth' bull market phase. The secret is out.
I don't think, though, it signifies the top of the market. Things haven't got silly yet. So, for now, I have a lot more confidence in gold than I do in sterling, and for sterling buyers who don't yet have a position, £500-£550 an ounce looks an ideal entry point. We should see that over the next month or three.
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Keep money in cash...
So, apart from a percentage of their portfolio in gold, what should my friends do with their cash? They are not traders and these, in general terms, are traders' markets. That whipsawing trend looks set to continue. What's more, although we are in an environment of monetary inflation, this is more than being outweighed by debt deflation. I expect continued falling prices in alternative investments such as art, antiques, stamps and wine. So I would recommend that, for now, they keep a large portion in cash.
The problem is that the posse of financial advisers that they both have dribbling all over them do not, for the most part, get any commission if my friends stay in cash. That's the way the system works (although perhaps not for much longer, if the Financial Services Authority gets its way).
They earn more money if my friends buy one of their financial products, which will usually derive from an investment in stocks, bonds or real estate – and the greater risk with all three classes remains to the downside, in my view. I'd wager that, if pressed, (ie we saw what they were doing with their own money) most financial advisers would agree with me. The ridiculous situation is that financial advisers are, in many cases, incentivized to give bad financial advice.
...but not sterling
But although I say keep your money in cash, I would not recommend sterling. It has enjoyed a nice rally these last few months, so this is an opportunity to get out. Such is the scale of the underlying debt, I think that not far down the road our currency could face major problems. As I live and work in the UK, should these problems occur, I will take a hit along with everyone else. But if I can get as much of my cash as possible into foreign currency, at least the blow won't necessarily knock me out.
In principle, I like the Canadian dollar, the Chilean peso and the Norwegian krona. All three have stable governments, rule of law, reasonably stable banks, comparatively low levels of debt and, being commodities producers, run a nice budget surplus. I also like the Singapore dollar. But, wearing my traders' hat, none of them look a buy here. The US dollar does. For all its flaws it remains the senior global currency. If we get our next leg down in the stock market and our next round of debt deleveraging, it will benefit just as it did in 2008 with another flight to 'quality'.
I'd like to continue with this theme next week and take a look at the Kondratieff Cycle, but that's all for now.
Our recommended article for today
Gold has yet to break and hold the $1,000 mark. But when it does, there will be no stopping it. And $2,000 an ounce is a perfectly reasonable expectation.
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Dominic Frisby
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