Dear ,
"A Basic Tenant of Investing Has Been Destroyed" or Has It?
As many of you know I like to read the news from some of the overseas papers and websites because it helps give me a different perspective than what I get here at home. I'm not saying it is better or worse, only different. The article that I am going to start with today comes to us from Der Spiegel in Germany. Take a look.
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It is a problem that is plaguing not only big investors, but small investors and all investors in between. Where can we get a decent "safe" return? As the article talks about, assumptions from the past that were considered "givens", are no longer true. Let me give you an example from the article.
As head of the Norwegian sovereign-wealth fund, Slyngstad collects his country's oil revenues, which currently total more than €100 million -- per day. The fund is supposed to use these revenues to provide the country with prosperity for the long term. It's no easy task, because the government expects Slyngstad and his staff of more than 300 people to generate a 4 percent return on investment.
In the past, investment professionals would have dismissed this requirement as uninspiring. But times have changed. Between 1999 and 2007, the Norwegian sovereign-wealth fund achieved an average annual return of almost 6 percent, but during the last four years it has only been about 1 percent on average.
What Used to be Considered Easy Is Now Considered a Stretch
4%? No problem. Not anymore! I think Mr. Slyngstad's observation is spot on. ""In the past, we searched for risk-free returns, today we know that what we mainly have are investments with return-free risk."
One of the things that we have written about in the past is that there are risks to every strategy. Or to put it another way there is no such thing as a risk free strategy. It's a matter deciding what risks you prefer to accept. You want safety? Then one of the risks you accept in today's environment is extremely low yields on your money in return for the safety of your money. As the story above noted, the Sovereign Wealth Fund has only done about 1% a year for the last four years.
Is It Wrong To Focus On Safety?
That is a question that each and every one of you needs to decide for yourselves. I will however share a quote from a friend of mine, Bill Nelson. "One of the differences in the way Wealty Americans invest vs. the way Working Americans invest is that Wealthy Americans focus on not losing money first, then they worry about rate of return. Working Americans focus on rate of return first and foremost.
Let's see what the article has to say about this issue. This next section is about a banker in Frankfurt whose family has successfully run this bank for almost 350 years! I'd say they probably know a thing or two about safeguarding money.
For Frankfurt banker Friedrich von Metzler, 69, this is a long-awaited triumph. Metzler has always preached modesty to his customers. Oil portraits of his ancestors hang on the wall in the conference room at the headquarters of his private bank. The bank has been in Metzler's family for almost 350 years, and it has survived plagues, hyperinflation and two world wars. Metzler's private customers have three choices for investing their money: bonds, stocks or cash. "If that isn't enough for someone, he'll have to go to the competition," says Metzler.
This attitude doesn't deter many of his wealthy clients. On the contrary, business is better than ever. Recently, Metzler has had to reiterate his mantra, which runs counter to human greed, again and again: "In the long term, preserving one's assets in real terms is already a success."
That sounds like another way of saying what my friend Bill Nelson says, doesn't it?
Yeah but what about the stock market?
What about Asset Allocation and all that? Shouldn't I have a bunch of my money in the market? Again, that depends on what risks you are willing to accept. If your goal is growth then I would say it would probably be an appropriate choice for you. If your goal however is safety, then not so much. Notice I didn't say not at all, just not so much.
As an example, here is what the article tells us about the insurance industry's current allocations.
Stocks? "The insurance companies' equity investments are at historically low levels," Blau says. Recently, the industry has only invested an average of 3.3 percent of its assets in stocks.
So again it all depends on what risks you are willing to accept.
A Search For Alternatives
Because of the current environment we have all been forced to search for alternatives. If you are currently a client of Reames Financial, you will probably recognize some of these ideas that have been implemented in your own portfolios.
In the past, money manager Blau had no qualms about buying bonds issued by banks. But since the Lehman Brothers bankruptcy and the Greek disaster, no investor is willing to lend banks money without demanding substantial collateral in return. Instead, Blau is increasingly making the kinds of investments that banks used to make, in real estate, for example. When Deutsche Bank sold its freshly renovated twin towers in Frankfurt to its fund subsidiary DWS last year, the financing came from Allianz.
There is little Blau isn't willing to explore in his search for investment returns, from infrastructure projects to wind farms. The latest craze is, of all things, parking meters. Two years ago, Allianz and a group of partners invested €1 billion in a company that operates parking meters in Chicago. And while banks shy away from funding Germany's cash-strapped local authorities, insurance companies are increasingly interested in municipal bonds. German life insurer R+V Lebensversicherung recently bought €20 million in bonds from the western German city of Wiesbaden.
Corporate bonds and the sovereign debt of emerging economies, once something for the intrepid, are suddenly seen as safe havens.
I Do Take Exception-
to one part of the article however.
Most of these players are managing the money of small investors, billions in assets with which they do not want to gamble. Instead, their objective is to invest the money so that they can eventually pay out a sizeable pension or the proceeds of a life-insurance policy to their customers. However, this usually works only if the money is invested safely, while at the same time generating yields of a few percentage points.
But in many cases, such yields are no longer realistic, now that Greece's creditors have had to write off a large portion of their claims. As a result, a basic tenet of investing has been destroyed. The bonds of major industrialized countries were considered risk-free investments for decades. But now it's become apparent that bond investors can also lose their money. No one knows what a safe investment is anymore.
No one?
Actually I think there are quite a few very skilled people and companies out there that can recognize safe investments when they analyze them. There are still insurance companies out there that are offering guaranteed returns of 3% or better. There are still alternative investments out there that are executing their business strategies successfully every day to the benefit of their shareholders. There are still "Safe Money" strategies available today that will allow you to focus on risk first.
So what are you looking for? Safety? Alternatives? SafeMoney strategies? Whatever it is, I'll bet we can provide you with ideas and options that you haven't seen before. If you'd like to know more about any of the ideas above then just click on the email link below and simply tell me what you are looking for.
[email protected]
Until next week , Protect Your Wealth!
Sincerely,
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