Every year Credit Suisse publishes the Global Investment Returns Yearbook. It’s a summary of how different asset classes have performed over the last 100 years or so. It also includes a bit of analysis and comment on what that means for investors.
The main conclusion from this year’s study was pretty predictable…
Returns on all asset classes are likely to be very modest in the next few years. That’s why pensioners-to-be need to ferret away more cash than ever. How much?
Well, according to Allister Heath of City AM, the findings suggest that most people should probably think about something like a quarter to a third of their salaries.
And given that most people won’t save anything like that, “a horrible crisis is looming”.
Today I want to show you why I think this situation is scandalous. And I’ll look at what it all means for your asset allocation this year.
A torpedo takes out capitalism
The fundamental tenet of investment is the idea that a pound is worth more at present than in the future… because if you have it now, you can earn interest on it.
But the Credit Suisse study suggests (as if we didn’t know already!) that we can’t expect to earn much on savings anymore. Basically, the time value of money has been obliterated. You probably know by now that I put it all down to the central planners. Governments and central banks have gradually removed free capital markets from capitalism. And that has torpedoed the time value of money.
And things are set to continue along this path.
The planners won’t change course, of that I’m sure. And if the public increase their rate of savings to anything like a third of their salary, then demand for investments will drive yields down even further.
We’re constantly chasing our own tail. And returns on investments are heading toward zero…
Buy what you can kick
The planners attacked the bond markets first. By relentlessly buying government bonds, they drove prices up (and yields down)… which means that pension investors must pay crazy prices for the same assets. It’s the main reason why pensions are now so expensive.
But the real beneficiary of the collapsing time value of money is ‘stuff’. What stuff? Stuff is whatever you can kick. Practically anything – houses, classic cars, antiques, gold, silver. Stuff pays no interest anyway, and if financial assets can’t reward investors in a way that matches their risks, then why hold them at all? Why not just buy stuff?
The way I see it, the planners inflated the bond bubble first – Right Side followers were in on that. Now they are inflating the equity bubble – and it’s useful to have some exposure to that too. But the final bubble to inflate is commodities.
How to build commodity exposure
It’s why I recently upped my commodities allocation from 25% to 30%. Commodities are the financial equivalent to ‘stuff’… and unlike alternative investments (like wine, cars and antiques), commodities can at least go into a Sipp or Isa.
However, commodities are a difficult area for private investors. Exchange-traded funds (ETFs) are probably the easiest way in, offering exposure to anything from precious metals to agri-commodities and oil. You can buy ETFs through your regular stockbroker. But beware, you’ll have to do your homework. Make sure you understand the concept of ‘roll-yield’ before you put your money down.
In September, for instance, I showed you my homework on the Brent crude oil ETF. Because of roll yield, this fund was set to appreciate, even if oil prices remained stable. And it did.
Better still, the oil price moved higher. It’s been a great bet, and it still looks like a good one to me.
But if you’re not keen on ETFs, you can get exposure to rising commodities through judiciously selected equities. MoneyWeek magazine is forever reporting ideas on these sorts of trades.
The point is, government meddling has totally twisted the price and the returns from financial assets. And that ultimately means that most private investors don’t have adequate exposure to commodities. Over the years that’s been pretty understandable. I mean, why would you want to hold the financial equivalent of ‘stuff’ if it doesn’t pay a respectable yield?
But the way we’re heading, pretty soon there won’t be any income on financial investments anyway. All they’ll offer is risk. That’s why investors are gradually moving towards stuff – and I think the flow is set to continue.
However you get your exposure… just make sure your portfolio isn’t underweight stuff.
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