Friday, 16 September 2011
Investing for the next decade
Image from www.financelearning.co.uk
The Sunday Times recently gave a rundown on investments over the last 10 years. It does not make pleasant reading for any serious investor.
It gives the total returns over ten years as being as follows:-
Emerging Market Equities 325%
Vintage Cars 273%
High Yield and Emerging Market Bonds 175%
Corporate Bonds (High quality) 97%
Government Bonds 89%
UK Residential Property 78%
UK Equities 34%
Antique Furniture -18.3%
So what conclusions can we draw from this if we are planning an investment portfolio for the next decade?
The first clear conclusion is that equities in the developed countries of the UK, USA and Europe have completely failed to deliver any kind of acceptable returns over a long period of time. With economic outlooks and growth prospects in these countries continuing to be so poor, Luxury Hedonist fails to see how they are going to deliver over the next decade. So why do Private Banks and other portfolio strategists continue to blindly recommend that large proportions of any investment portfolio should be placed in these countries’ stock markets?
The second conclusion is that Emerging Market Equities, probably for the first time over a decade, have produced consistently good returns. Over this last decade, a shift has occurred. China, Russia, India and Brazil, the so called BRIC countries have become more developed countries, and they are creating the growth that is so lacking in Western countries.
The third conclusion is that alternative investments, once the preserve of the extremely wealthy, are here to stay and should form a decent part of any investment portfolio. So why do Private Banks and other portfolio strategists continue to place such a small allocation to these investments?
So how can we design an investment portfolio for the next decade? Luxury Hedonist would argue that it is not acceptable for Private Banks to continue to blindly recommend the same kind of portfolio that they have recommended in the past. The world is changing, and has changed already, and it is time we had some forward thinking, and forward planning to accompany that. Some radical thinking is required here.
So how would Luxury Hedonist structure an investment portfolio for the next decade?
With the growth outlook for most developed Western countries being so poor, gold should continue to form a significant part of any portfolio (10-20%). The fact that the country with the largest cash reserves in the world, China, holds only 3% of its reserves in gold should underpin the gold price over the next decade, as they move out of US Government Treasuries and purchase more gold.
The UK Private Banks still recommend between 20-30% in UK equities and similar amounts in international equities, with a smaller proportion in emerging markets. Luxury Hedonist believes that the amount allocated to Western countries as a whole, including the UK, should be small, say 15-20%, but should also include well chosen hedge funds as well private equity funds in order to try and push returns along.
The bigger proportion of the portfolio, say 30-50% should be in BRIC countries, and a lesser amount in other smaller Emerging Countries. This should be via a mixture of investing directly in the major companies’ equities and good performing funds.
Luxury Hedonist would not invest in Japan at all. I have listened patiently for more than a decade to equity strategists making a case for investing in Japan on the assumption it would become ‘good’. The time for waiting is over. Japan will not come good in my lifetime.
Luxury Hedonist would eschew Government and Corporate bonds in general over the next decade. Interest rates in most countries are at an all time low, but will rise over the next few years to deal with increasing inflation. As interest rates rise, bond prices fall, and bonds will not produce acceptable returns over the period.
Alternative investments should form a part of any serious investment portfolio these days, up to around 10-20%. However, although stamps and vintage cars have done well over the last decade, these are very specialist areas, which do not have any reputable and suitable investment vehicles for an investor to invest in at the present time.
There are however, some good wine funds around, and some companies will also manage a private portfolio of wine for a large investor, which is an excellent option.
Investing in art is also a serious option to be considered. There are one or two good art funds around, and even a company which will manage individual investment portfolios composed of art for investment. Art has also been an excellent investment over the years (see article Art as an Investment by Luxury Hedonist).
Many entrepreneurs may find it very frustrating. They have used their intelligence and application with hard work to create serious amounts of wealth. When they realize some of that wealth by selling or part selling their companies, they might have been justified in thinking they had done the hard part. However, recent evidence shows us that investing that money over long periods of time, in order to make it grow, may be just as challenging as creating the wealth in the first place!