The Safest Investment Strategy Next 5-10 Years
A lot of times investing is about protecting the downside risk as much as achieving a positive return. This becomes especially true as one grows older or when in retirement.
So in my opinion, the safest investment strategy over the next 5-10 years, involves investing in international stocks that pay a solid dividend.
The downside risk that needs to be protected against is an over exposure to U.S. equities for two reasons.
Number 1: Being over exposed to one country is not a diversified strategy. There have been two instances in the past where major markets like the Nikkei (Japan) and the FTSE (Europe) were halved and took twenty years to recover. The U.S. markets already have high valuations that are relying on an easy monetary policy that is already walking a tight rope to stay balanced.
Number 2: There are so many companies around the world paying dividends in stable currencies. There is always "currency risk" when investing. However we can mitigate this risk by investing in stable diversified currencies.
Both reasons run hand in hand to a degree. If you have an investing strategy that involves using dividends as a growth tool or retirement income then these reasons are quite important.
Imagine a situation where a 5% dividend from high yielding stocks is your stream of income. Well what happens when the currency the dividend is being paid in starts to be eroded away by inflation? A 5% dividend is fantastic except when the currency it is paid in also has 4-5% inflation. The investors purchasing power becomes completely muted.
However, if that same investor owns a 5% dividend stock being paid in a stable currency with a 1% inflation rate then the investor maintains the purchasing power they are looking for.
As you can see from this headline-- Inflation in the United States is on the rise and has been over the past six months. This six month time period has also surpassed the expectations from leaders at the Federal Reserve. The question is whether or not these moves in inflation are "transitory" as they say or if they will persist for the foreseeable future.
FORMER FEDERAL RESERVE BANK CHAIR WOMAN AND CURRENT TREASURY OF THE SECRETARY, JANET YELLEN, RELEASED THIS STATEMENT BELOW ON JULY 15TH 2021.
SIMULTANEOUSLY CURRENT FEDERAL RESREVE CHAIRMAN RELEASED THIS STATEMENT BELOW.
Current Federal Reserve Chairman, Jerome Powell, stated during a senate hearing that he is experiencing concern over current inflation rates. My belief is that he understands changing current easy monetary policy will negatively impact markets so severely that he is willing to accept the inflation as it comes as the lesser of two evils.
My question to every investor is... Why even play this game if there are other games in town? Why sit in the U.S. Stock market when there are plenty of viable options internationally that can escape the tight rope the U.S. is trying to walk? The choices seem to be collapsing asset prices if the Federal Reserve chooses to tighten monetary policy or losing purchasing power if they opt to do nothing at all.
TAKE A LOOK AT THE 3 YEAR USD INDEX BELOW. THIS IS THE U.S. DOLLAR'S PURCHASING POWER AGAINST FIVE OTHER CURRENCIES.
As you can see-- The U.S. dollar has been sliding since the covid pandemic. However, the purchasing power has actually held up rather well as the USD dollar index currently sits at 92.70 as of July 16, 2021. Take into consideration that the US dollar index hit a low of 72 during the 2008-2009 financial crisis. The USD resiliency is incredible considering our monetary policies in the recent past. Since covid began we have expanded the Federal Reserves' balance sheet from $3.7T to $8.2T since March of 2020. This is an amazing increase of our monetary supply in 16 months. Most of this inflation has shown up in stock prices and real estate. So with all things considered we have maintained a decent purchasing power with the massive monetary supply increase. Only recently is inflation beginning to hit our consumer goods over the last six months. This is an experience we didn't have immediately after the financial crisis of 2008-2009-- even though we were expanding our monetary supply at record rates during this time period as well. Our inflation then only acted as a function lifting asset price such as real estate and stocks. Ultimately helping asset owners but acting as a headwind for the bottom class.
HOW LONG WILL THE REST OF THE WORLD AGREE TO LOAN MONEY TO AMERICA IF WE ARE PAYING THEM BACK IN A DEPRECIATING CURRENCY?
A 10 year U.S. Treasury bond is currently yielding 1.20%. Our year over year inflation rate was north of 5%. This means the U.S. has to hold bond auctions and find someone dumb enough to loan the U.S. money at a guaranteed loss for ten years!
The world is waking up to this notion and so should American investors. Our inflation is wiping out our ability to be a suitable candidate for loans at current interest rates with high inflation.
Our primary lender has become... well ourselves. The Federal Reserve is monetizing U.S. debt at a staggering rate.
Our 2021 fiscal deficit is projected to be over $3T. The federal reserve expanded the money supply by over $100B in the month of June. If this rate continues the U.S. States government will be loaning itself about 30% of the deficit it continues to run. The only reason why the U.S. can get away with this behavior is due to the reserve currency.
However, how long can the U.S. be anointed with the position as the reserve currency with this type of behavior. We no longer represent the characteristics that we once had that put us in the position in the first place. Once we were the world's largest creditor nation and now we are the world's largest debtor nation.
Just last month we saw our import costs rise 11%. This 11% print may be a historical record for the United States. As we know--the U.S. imports approximately 70% of our goods. This means the cost of 70% of the stuff we import had an 11% increase of cost.
So the United States finds itself printing more money to pay for import goods that it can further no longer afford due to the rising costs. As this continues or budget deficits will continue to expand and our debt will accelerate. Ultimately eroding our standard of living away over the long term. Unfortunately, we can't stop the cycle because printing money is the only way we can afford our standard of living of today. We locked ourselves into a perpetuating cycle that politicians don't have the gumption to get us out of.
In my opinion, when this all unfolds--just like in 2008, everyone will say things like "well things are 20/20 in hindsight" or "nobody could see this coming". When in fact it is been obvious the entire time.
The phrase "currency risk" has a scary connotation attached to it. However, currency risk can be something investors would want to take on in the right environment. Especially over the next 5-10 years in my view.
RUN TOWARDS THE "CURRENCY RISK"
About 80% of international transactions are conducted using the U.S. dollar. This is why most companies hold their debts in U.S. dollar. Can you imagine what will happen to these companies balance sheets when their local currency vastly improves against the currency their debt is held in? This environment will liberate these companies of their debts with this currency risk situation. Their net profits will soar. Not to mention they will continue to pay dividends and perhaps continue to raise their dividends paid out in their own currency.
U.S. investors can absolutely take advantage of this investing strategy. It is absolutely the safest way for them to protect their purchasing power, position for great upside potential, and limit risk entirely.
To put it simply-- invest in stable companies in stable currencies. This is my favorite strategy for the 2020's.
John Lawrence is a financial advisor and the owner/founder of J.A. Lawrence Wealth Management.
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