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:-

 

Gold 537%

Emerging Market Equities 325%

Wine 279%

Vintage Cars 273%

Stamps 213%

High Yield and Emerging Market Bonds 175%

Corporate Bonds (High quality) 97%

Government Bonds 89%

UK Residential Property 78%

Cash 57%

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!

  

Gold, the Shining Investment

Gold is like the reserve currency of the world. It has traditionally been used as a hedge against inflation and crises. Unlike most other commodities, most of the gold that has ever been mined, still exists in the world, and so like all investments its price is subject to supply and demand, and speculation as well.

 The biggest holders of gold are the central banks around the world, who still hold gold as part of their reserves. It is interesting to note that one of the countries with the largest cash reserves in the world, China, holds only 1.3% of its reserves in gold. Were China to increase its holdings in gold to a more significant degree, the effect on the gold price would be significant.

                                                             Image from www.mindmillion.com

 So how has an investment in gold done in the last few years? If you had invested $10,000 in gold in 1999, it would have increased to $38,300, an increase of 283% in ten years. If you had invested the same amount in US shares in the Standard & Poor’s 500 index, your $10,000 would have reduced to $8,600, a loss of 14% over the period.

 If we take our performance figures back a longer period of time, again gold does pretty well compared with almost any other kind of investment, as long as it is held for relatively long periods of time (five years or more). Taking the figures from 1979 to the end of 2008 (a time period which favours shares ) gold produced a return of 5.36% p.a. as compared to 11.92% p.a. for shares (a compilation of NYSE, AMEX & NASDAQ exchanges), and 5.89% p.a. for 3 month Treasury bills. If you take the figures from 1970 until 2010, gold has produced a return of 3,792% in the forty years, whereas the Dow Jones Industrial Average increased only 1,280% in the same period.

We should not get too hung up on figures, as they can often mislead, but the point holds true-gold has been a very good investment for long periods of time. It does not suffer from the same wild variations as a share portfolio, and will never lose all its value. Therefore gold should hold a reasonable percentage of any investment portfolios, of between 10-20%. Gold is an investment you can buy and then forget about, something you cannot afford to do with any other kind of investment.

The question is, how is the best way to hold gold? There are a number of ways of holding gold or gold equivalent from buying the shares of gold mining companies to purchasing ETF’s (Exchange Traded Funds), and other similar instruments. However, Luxury Hedonist believes that the best way to hold gold is either to buy gold coins such as krugerrands, but a better option is to buy gold bullion.

Gold bullion can be purchased through a Gold broker, such as Bairds in the City of London. You can purchase either an allocated or unallocated amount of gold. If you purchase an allocated amount of gold, the broker will purchase that specific amount of gold for you, and also charge you insurance and storage costs. However, if you purchase an allocated amount of gold, you are not charged any insurance or storage costs, which can amount to about 0.25% p.a.

                                                             Image from www.savvygoldtrader.com

 In conclusion, gold has been a fantastic investment for those who have invested in it. Although it will not pay a dividend or interest, it will never lose all its value, and over time it will rarely disappoint you with its returns.

The Genius of Warren Buffet

 Warren Buffet is one of the most successful investors of all time. The numbers speak for themselves. Berkshire Hathaway, Buffet’s holding company has averaged an annual growth rate of 20.3% to its shareholders over the last 44 years. If we compare the company’s returns against the normal stock indices, his performances are even more remarkable. Berkshire Hathaway produced a total return of 76% from 2000-2010, as opposed to a negative return of 11.3% for the S & P 500 for the same period.

So how does Warren Buffet make so much money for his shareholders? Buffet is a discipline of Benjamin Graham, and his system of value investing. At its core, this is a system of investing whereby a company is purchased at a price which can be considered under valued. Needless to say, buying companies at good prices is not an easy activity, but requires endless patience to wait for the right moment. Unlike most fund managers who are passive investors, Buffet is an active investor. But, Buffet does not just buy a small shareholding in a company, like most fund managers, he will often buy the whole company. By this method, he can exert a decisive influence on how the company is managed.

Many of Buffet’s early company purchases were insurance companies, which are effectively, if well managed,  money machines because they receive great quantities of cash by means of insurance premiums. But, today Buffet’s principles of management have been spread to a whole range of companies including railroads, confectionery, retail, home furnishings, encyclopaedias, manufacture of vacuum cleaners, jewellery sales; newspaper publishing; manufacture and distribution of uniforms; as well as several regional electric and gas utilities.

So what are the principles Buffet uses to manage the companies he owns? Buffet leads from the front with everything he does, by setting a personal example. This immediately cuts out excesses in salaries and management expenses. His own salary is fixed at $100,000 and has remained the same for many years, despite being one of the richest men in the world. His companies also eschew debt as much as possible. Buffet creates the right balance in his companies between the major interest groups of shareholders, management and employees.

Buffet employs serious professional management who are given the freedom to manage the companies for the long term according to the principles established by him. They are accountable to him for the management and results they produce.

Buffet only invests in companies he knows and understands. He sticks to his guns through thick and thin and does not let himself be distracted by market reactions or criticism of his way of investing. During the Dotcom boom Buffet was widely criticised by many critics who argued he had not only missed the technology boom, but also that he had not adapted his methods to the ‘new market dynamics’. The subsequent crash of technology companies showed that all companies have to abide by the same rules, and that some technology companies can also become obsolete and worthless very quickly.

Buffet has shown beyond all doubt that his principles work over long periods of time, and many other investors could do no better than to heed his wise words and methods of investment.