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International Investments



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international investment philosophy

International Investments: Stay Cool
By Gary Scott

international investment philosophy

* International Investments – Stay Cool with Enough

* Natural Health Tip – Stay Cool with Triphala

* Ecuador Real Estate – Sat Cool With Your Own Business

Cool. This word has definitely taken on a new meaning in the last decade or so. Change. It’s everywhere including with words.

I was cool the other day sitting on our front porch, working in the chilled morning air. A deer (below) grazed on clover in our front meadow.

I was reading an article in the money section of USA Today in the regular “Your Portfolio” column entitle “Jack’s in good shape so no need to take risk”. It pointed out that Jack who is 66 and still working full time had a savings portfolio of $584,000. He is thinking about shifting to part time work.

Read at least the abstract at pqasb.pqarchiver.com/USAToday

Better still, pay to read the entire article.

This led to the question, “How much is enough”. The reality is that no one knows how much will be enough, especially when inflation is hot. Inflation and US debt make articles like this totally upside down wrong. Jack even in what appears to be great financial shape is very much at risk. He could be in even a worse position if he follows the advice in that article.

History suggests that when Governments control money, inflation destroys its value. Changes taking place are not cool. The Western population ages as it grows. Natural resources decline. U.S. government debt is at all time highs and rapidly rising. Politicians are bolder in their lies. The Iraqi quagmire escalates. Increased security costs increase the price of everything. The Social Security and Medicaid numbers make no sense. A record number of baby boomers are about to retire.

Another historical economic fact is that the retired on fixed incomes always get screwed first when society and the economy collapses.

Let’s go back to Jack and that USA Today article. It told how Jack should make his equity investments more conservative. His portfolio had 14.5% in global stock funds and 8.7% in emerging-market funds. The article stated that this could be volatile, doing well one year and horrible the next.

The article showed how one bad year could really hurt the portfolio and stated that if Jack enjoyed a 10% annual return on investments for three years, then lost 10% in the fourth year, he would need a 34.4% in the fifth year to regain their 10% annual average. The article went on to suggest that Jack change the portfolio from 87% stocks and 13% cash to 57% stocks, 13% cash, 5% real estate and 25% bond mutual funds. It was suggested to reduce the foreign exposure from the current 23.2% to 10%.

Jack’s pension and social security are adequate for his lifestyle now so he does not need to draw too much on these investments. Thus the article suggested a more conservative portfolio.

This could be really bad advice. Jack has two huge risks. First, he has medical insurance only until he retires. This creates an enormous problem we’ll look at in a moment.

The second risk is the greenback. This is the one investment that has proven it is really volatile!

What can Jack’s $584,000 earn? If Jack spends 4% per annum of his portfolio it’s an extra $23,000 a year. If he does not need that now why not go for more growth to protect against inflation and the possibility of down the road medical problems.

Traditional thought in America says America is safe and steady, overseas markets riskier. Funny, traditional thought in England is that Britain is safe and overseas markets riskier. Guess what the thinking is in Germany and Japan!

Instead, let’s look at some facts. Emerging markets have just gone through a clean out. They are perhaps low and offer good value. Wall Street is still at the end of a mid term rally in a long term bear market and share prices are definitely not at good historical values. Fundamentals suggest that US shares have a greater chance to fall than many emerging markets.

Plus right now bonds could be a really bad deal. We saw in a recent message that nearly 100 years of history suggests that during hot inflation bonds are really not cool. See http://www.spottingtrends.com/index.htm

Finally in the next 20 years the US dollar is very likely to fall, perhaps as much as 50%. Fundamentals suggest that the dollar is one of the most volatile investments of all! Holding the dollar versus euro or yen over the long term in the last three decades has been a guaranteed way to purchasing power.

The word conservative (just like cool) has changed. Conservative is a word advisors use for investments they are familiar with. Familiarity does not necessarily mean good value.

Conservative is based on the past and looking back. Conservative lacks change. These features are not cool.

No accord was given in any of Jack’s advice as to which currencies or markets had value. The advice that Jack has received really is not conservative for a future of change at all.

Let’s look at this in another way.

Since Jack does not need the investments to live on now, let’s forget the bonds. For diversification he should hold more real estate and more (not less) overseas shares.

He needs a bigger cushion. His fixed income is at risk from inflation. His huge risk is the chance of high medical costs his wife may face. She will not be eligible for insurance once Jack retires. One or two heart surgeries could put a mighty dent in their savings!

Fortunately Jack also has the safest investment of all, his ability to serve. He has developed a service with a value that can rise with inflation. So if he needs more income, he can work a bit more.

Let the value of the portfolio grow for another five to ten years before they need to draw on funds. This extra growth will come in handy if catastrophic medical bills arise. This catastrophic risk is a sad state of affairs that so many people in America face.

In the next segment of this message, we’ll see a natural health tip and one thing that Jack and his wife could do to reduce their biggest risk of all without altering their investment portfolio.

Until then, may what you have always be enough and cool.

Gary

P.S. Join us in Ashe County. Learn more about investing in overseas markets. 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. Our free accommodations here on the farm are reserved on a first come first served basis so do not delay! Go to garyascott.com/catalog/ibeznc.html

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international investment philosophy
July, 2006
international investment philosophy

 

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