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International Investments



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International Investments - Inflation Fighting Ideas

By Gary Scott

Inflation is here. Don’t believe me? Go shopping. Try to buy a red or yellow pepper. Yet we need not despair. Inflation is a good time to make money! So what should we do? How should we invest? Let’s see if history gives us a clue.

Since no solution to the U.S. debt and trade imbalances seem to be in sight, let’s look at how various international investments fare in varying inflationary scenarios. A long term 95 year research by asset allocation expert, Ibbotson Associates, looked at various returns over 95 years of differing assets classes under varied conditions.

The asset classes were Bonds, T-bills. Equities, Housing and Silver. Over the entire 95 years the return was:

Equities 11.9% per annum
Housing 6.7% per annum
Bonds 4.8% per annum
T-Bills 4.6% per annum
Silver 4.2% per annum

In normal circumstances, if you want the best long term return, just stick money in the stock market. Life is rarely quite so simple. Results are very different when the economy is viewed in Deflationary, Stable, Moderate Inflationary and Rapid Inflationary modes.

Deflation turned everything upside down: See how lousy shares were in this scenario.

Equities -6.2%
Housing -0.5%
Bonds 4.8%
T-Bills 4.6%
Silver -15.3%

Bonds and cash are king during deflation! But we are not in deflationary times. During Stable Times the returns of the asset classes have been:

Equities 14%
Housing 5.9%
Bonds 5.3%
T-Bills 3.1%
Silver 0.7%

I do not think we have price stability now either. Inflation is even worse than the figures show…and with high energy and commodity prices are likely to get worse. We are seeing at least moderate Inflation, an economic situation where stocks and real estate look best.

Equities 14 %
Housing 5.9%
Bonds 5.%
T-Bills 4.6%
Silver 0.7%

If events deteriorate and worsen, we could see rapid inflation. This should bring huge changes to our investments of choice.

Equities 9.6%
Housing 7.0%
Bonds 3.6%
T-Bills 5.%
Silver 17.9%

Metals become king and stocks and investments run second and third. However…real estate may be the king of anti-inflation.

Here is why:

You can most easily and safely buy real estate with borrowed funds for three reasons.

First, real estate tends to rise in inflationary times and remain steady during times that are bad. Real estate prices do not fall quickly as prices do with shares or metals. The price of gold, silver or equities can plummet overnight. This is bad if your positions are highly leveraged. Let’s take an example of a leveraged $50,000 investment with leverage of an added $200,000. The $250,000 total is invested in shares, gold or silver or maybe all three. In a month (as an example), the shares or metals temporarily drop 20%. That’s a loss of $50,000 (20% of $250K). Your original capital is gone. Unless you have more cash to put up, your lender will ask (or tell) you to sell the assets. You have lost it all…because you have to liquidate at the worst possible time.

Real estate does not move that way. You get a mortgage. Prices can plummet short or even long term. As long as you make that monthly mortgage payment, you are fine or at worst you can somehow hang on.

Second, most real estate can produce some kind of income. When purchased correctly it may even generate enough to pay the mortgage. Equities pay dividends sometimes…rarely enough to support a loan. Gold and silver just cost money to hold.

Third, you can get long term, fixed rate mortgages. Most leveraged loans for stocks, gold and silver are short term and variable. These short term loan interest rates can also usually rise with inflation.

There is one more reason. Most of us find it easier to get a handle on the value of real estate. Stock values are really hard to determine for the average investor. If the management of a company is honest and the auditor competent, I still defy most investors (ME INCLUDED) to read and understand a balance sheet. You will almost always find some analyst saying the shares are good and others bad. This difference of opinion is what makes the market!

With property, one can walk around the block and get a feel.

If I am right and we are headed for growing inflation and if history is an accurate guide; the best portfolio will be a combination of stocks, real estate and metals. Plus if you want faster growth there will be some leverage.

See my portfolio and how it has shifted over the past years

See my latest portfolio update

Another benefit about investing in real estate is that you can often enjoy the investment as well. It may even improve your health.

Merri and I often think about the importance of enjoying your real estate investments as we sit on the deck at our North Carolina deep woods office, (shown above). We are linked to the busy world but live in peace and harmony with nature as we overlook the creek. Plus we fight inflation as real estate values rise.

Learn more about fighting inflation by investing in emerging currencies, gold, silver, Ecuador, import-export, overseas markets and more. Join Merri, Thomas Fischer from Jyske Bank Copenhagen and Steve Marchant from Ecuador and me at our September 15-16-17, 2006 International Business and Investing Made EZ course in North Carolina. Review where to invest and do business now and learn which markets and currencies may be strong in the year ahead. Learn more about Ecuador from Steve. Our May course was overbooked and the September course is filling up quickly. Our free accommodations here on the farm are reserved on a first come first served basis so do not delay! Go to http://www.garyascott.com/catalog/ibeznc.html

Gary

June, 2006

 

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All contact copyright Gary A. Scott (1968-2006) unless noted otherwise