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International Investments - Calibration Celebration

international investment trends

By
Gary Scott

* International Investments – Time to Recalibrate

* Natural Health Tip – Freedom of Food

* Ecuador Real Estate - Freedom of Longevity

July 4th is a day when the US celebrates its independence….a day to celebrate freedom. Then I began to wonder. What the heck…really…is freedom? I could not honestly give an answer to that question. So I looked for a definition.

Wikipedia says: “Freedom is the absence of restraints upon our ability to think and act (except those restraints that are of natural cause).”

I won’t get into how that state rarely exists anywhere I have lived. Instead I settled on a simpler meaning. “Freedom is the ability to change.”

This is an important celebration. A recent note from a reader in England reminded me of a how very important. He wrote:

“I think I need to recalibrate my expectations and understanding of certain financial rules of thumb, as they may be working against me. For example, I understand that you should never pay more than one quarter of your income for rent and or a mortgage on your residence. However, this seems virtually impossible now. The Daily Mail headline yesterday was 'Mortgage Soaks up 42% of Salaries' as UK mortgage debt nears £1 trillion.’

“They point out that in 1986 the average mortgage was £25,000. Today it is £115,000 and much higher in areas like London, the Cotswolds and the SW. The average take home pay of Brits is £20,500. The average cost of a home is £170,000 - £200,000 (the equivalent of US$400,000).

“Typical homeowners are borrowing three to five times their salary to put a roof over their head. They also point out that nearly 90% of people under the age of 30 cannot afford to get on the property ladder. I'm currently happy with my monthly accommodation expenditure but it buys me a single room to rent in a shared house. To buy my own property would be a major challenge and given the prospect of rising interest rates I don't want to become one of the 68,000 people a year in the UK who become insolvent because of housing costs! So given that lot, might it be wise to look away from seeing personal housing as the traditional mainstay of building personal financial security and look in a new direction?

“In addition, my grasp of the virtues and vices of credit and debt is not good. I have a visceral dislike of credit and loans but it now seems this may be counterproductive. In general, are there any rules of thumb to personal financial security that worked when you were my age but simply don't apply any more? What then are the new rules?”

This is why it is so great to live in a free country like England or the US. This reader is free to change how, where and when they live.

The Western world may be free but economically (as we can see in this note above), more and more people are being robbed by inflation of what we think of as a pretty simple freedom, to have a home. My reply to that reader may help deal with inflation.

Inflation is a huge problem in the West. The US, Europe and Japan have aging populations with bubbles of population heading toward retirement A recent USA Today article entitled “Retiree benefits grow into a monster” outlines how taxpayers owe more than half a million dollars per household for financial promises made by government mostly to cover the cost of retirement benefits for baby boomers.

The shows that US retirement costs will soar starting in 2008, and Medicaid costs will really skyrocket beginning 2011. The problem is growing as well since Federal state and local governments have added nearly $10 trillion (the Federal debt right now created over this nation’s entire history is a bit over $8 trillion) in just the past two years.

This vicious cycle is almost certain to cause inflation in this great nation and cause the US dollar to fall. England, Japan and most of Europe are even more expensive and have even greater problems.

Those who understand the principles of everlasting wealth will not suffer if we have accurately spotted this trend. You are free to change. There are specific steps one can take to ride through and even gain during this downwards cycle. Here are a few inflation fighting ideas.

First, consider where you want to live. An average house in England costs $400,000. You can still buy a pretty nice place in the US for much, much less.

Look for example at these current two listings in Ashe County. See why I like Ashe County at garyascott.com/lostprovince/203/index.html

Perfect 2 bed, 1 bath home for weekend getaway or 1st time home buyer! This cozy cottage features new carpet & stainless steel appliances. Re-plumbed, new heating system & roof in 1996. Rewired in 2004. Relax in hot tub on large covered deck and enjoy great long-range view! $119,900

1Bed 1Bath rustic 104 year old cabin right on 1 acre with stocked trout stream in the front yard. $109,900.

Get more details from Trey Morrison at treymorrison@bellsouth.net

For Americans who even find the cost of living too high in the US, they are free to move elsewhere. For example you can still but a wonderful two bedroom, two bathroom house in Ecuador for $60,000.

Invest in this real estate with fixed interest debt. Inflation is the one time when debt is good. Borrow for as long term as possible with fixed interest even if the interest rate is higher now.

Second, invest in shares and avoid investing in bonds. Most businesses do not suffer during inflation. They simply raise their price. Bonds as investments tend do lose value during inflation. Keep in mind you want to be a long term fixed rate borrow during inflation. Holding bonds makes you a long term fixed rate lender, exactly the opposite of what you want to be.

Third, invest in some non dollar – non euro assets. When US debt causes the dollar to fall, it has to fall against something. Keep in mind that the third world nations are the young energetic places as America and other developed nations were centuries ago. Perhaps the Chinese yuan, Brazilian real or Turkish lira.

For example when I first began working and investing abroad (in 1968) a US dollar bought 400 Japanese yen. Today it buys about 115 yen. If you had invested $10,000 in yen then, it is now worth about $35,000 just from the forex rise alone. Foreign currency investments are difficult because there is so little information about them. However there are a growing number of financial planners who at least know about US mutual funds that invest in overseas markets. In addition you can learn more at a free course I provide at my website at garyascott.com/currez/index.html

Is Turkey a Turkey?

Investing in stocks or currencies is not without risks. Take for example an investment I recently made in a Turkish Lira bond. The interest is great but the lira has devalued a lot. I invested $100,000 two months ago and now the bond is worth about $83,000 in dollar terms.

This does not look good, but a sensible way to correct this is to invest in Turkish stocks! I have followed this market and observed that as the Turkish currency drops (because of inflation), the stock market rises even more.

We can get a feel for this by looking at the annual performance of the Turkish Investment Fund. This fund is a closed end mutual fund managed by Morgan Stanley that started in 1989 and is traded on the New York Stock Exchange. The fund invests in Turkish equities.

Its net asset value over the past ten years in US dollar terms is up 17.41% per annum. So although the Turkish currency has dropped through the floorboards in this decade, the stock market has risen far more than the currency drop. Although the fund’s NAV is up 32% in the last 12 months, it is currently down. The net asset value peaked in the $24 per share range this February 2006 and has plummeted to $15. I suspect that this is a very good time to buy this fund.

However this market is a roller coaster sort of like gold but with shorter cycles. The price drops and drops, then rushes up in spurts. Take a look at the annual performance of the share’s trading price in New York and its net asset value. If you do as I do and invest in this market and it has a -33.32% year as in 1998, you may regret doing as I have done…unless it’s followed by a year like 1999 when the NAV rocket up 274.05%.

Year Share Price Net Asset Value
1990 -43.25$

-35.71%

1991 16.38% - 4.56%
1992 -31.15% -40.10%
1993 171.39% 151.74%
1994 -59.85% -58.29%
1995 - 2.43% - 1.55%
1996 4.83% 17.22%
1997 36.67% 65.72%
1998 -39.28% -33.32%
1999 306.29% 274.05%
2000 -42.35% -40.40%
2001 -26.79% -28.31%
2002 -25.97% -32.24%
2003 166.90% 118.33%
2004 63.73% 35.90%
2005 53.76% 65.76%

Here is one more quick note. Observe in the numbers above how when the net asset value of the fund is down that the share price almost always drops even more. This is because investors hate loss. Yet note that when the NAV is up (especially way up), the share price is up even more. This is because most investors are greedy. They jump on the band wagon late.

So the best way to cash in on an investment like this is to get in when it’s on its way down. You can learn more about this fund at etfconnect.com/select/fundPages/global.asp?MFID=3857

Jyske Bank by the way has an open end fund that invests in Turkish equities which is where my money will go. You can get details from Thomas Fischer at fischer@jyskebank.com

Or go to jyskeinvest.com/3.0_products/default.asp?sPageID=3.1&sLangID=uk

Select JI Turkish Equity Fund in the Jyske Invest Int. Equity Fund drop down box.

So should you invest in Turkey or not? I will but let’s celebrate your freedom to choose!

Tomorrow we continue this message with a look at the importance of our freedom to eat what we want! THREE SUMMER HEALTH TIPS

Until then, enjoy your freedom!

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 garyscott.com/nccourse/index.htm

Learn more about Ecuador real estate in our last message

international investment trends
July, 2006
international investment trends

 

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