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What to Do With Investments in Current Turbulence?

2011 Aug 9

 

The question is really not an easy one. The problem is that there is no left any good investments on this world. Let’s looks at the most topical investments classes:

 

  • Stocks. Even before this turbulence stocks looked cheaply valued and attractive. However, when fear spreads so fast, it might be not the best option at all. Even if long term perspective looks bright, the nearest future of stocks has something repellent. Maybe it is a herd instinct.
  • Bonds. Investment in bonds by all books was described as the safest one. But is true now? In short term yes. But we don’t know how long these events will continue in financial markets until all main problems (too high debts of governments) will be solved. Over long term, I would say all fixed income investments are scary choice in current situation. The thing is that we might expect increasing inflation which will erode real value of money significantly. 
  • Gold. Looks like safe heaven, but is it? How long gold rally can continue? Investing in gold is so popular, and the price is so high, that it looks too dangerous to invest in it. Maybe gold investment bubble will not yet burst for very long time from now, still I would not dear to invest in gold now. Everything has its limits. 

 

So what do we have? All the hottest asset classes have some dark holes in it. 

 

Let’s stick to the main problem. The problem is a deep financial leverage of public finances: it includes not only South European countries, but Japan and USA as well. What is the easiest way to handle these debts? We will get back to easiest way. Now, the first try to handle the debts should be fiscal policy tightening. But it is really hard way, especially when recovery of the economies is so problematic. Cut of the expenses could hurt economies even more and that would keep high budget deficit even if cuts would be implemented. We are getting closer to easiest way. Easiest way is to pump more money in to economies, revitalize it. Of course, it will open inflation box, but who cares? Inflation will reduce the real value of the debts (instead of 120% from GDP it is going to be 60%) and governments will have no problems to repay it. Then the problem will be inflation, but it will be then. The problems of the future belong to those who will rule government in the future, and nobody worries about it now.

 

Now, we have to deal with current problems. And stock market now is a problem. In our days investment market growth is building slowly, but crashes are immediate. The spread of fear is hastily. That makes investment in stocks not so attractive. 

 

Also, we should not forget the worst case scenario. If governments would fail to bring confidence to the markets about its credibility, the consequences would be definitely unpleasant and every corner of the world would feel it. But I would not predict that. If there is a debtor there must be a creditor too. Only the relations between them have to be solved properly. In a worst case, governments always have a power to devaluate its currencies compared to GDP (the budget as well).

 

Going back to the stocks, I would think, it is risky. But investment in stocks always is risky. And the supporting factor is that in the current market there is no stock bubble. Stocks are cheaply valued and if government credit market will not go for the worst (you never can predict when herd instinct will weaken) they should rebound quiet fast.

 

As I have said, there are no perfect investments for the current situation. The best solution should be a good diversification. Investment portfolio should include various asset classes from different regions and sectors. 

 

Rokas Lukosius - an author of investment book 

 

Other articles you may like:

US Debt Relief

Where Are the Investment Markets Moving Now?

Problems in Greece: Is It Going to End?

How ECB Is Affecting Investment Markets?





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