How to beat a corrupt system

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.

• This article is taken from the free investment email The Right side. Sign up to The Right Side here.

Important Information
Your capital is at risk when you invest in shares – you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.

The Right Side is an unregulated product published by Fleet Street Publications Ltd.

Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No 115234.

  • Dee

    Thank you MoneyWeek.

    So refreshing to see things pecise & eloquently said. Now I know what to do next…

  • John J

    Regarding “Stuff” I have over the last 20 years been restoring and driving Classic Cars,nothing fancy though.
    It gave me free motoring almost and a lot of fun.
    I recomend it to anyone with a bit of common sense .

  • Steve

    My old boss had a small spiral wine cellar put under his garage and collected expensive Bordeaux wines and champagne with a view to selling them for huge profits in the future.
    I never did find out what happened. It sounds a great idea, but I don’t think I have the strength to resist the odd tasting session!
    In France, works of art are very popular because they’re also exempt from the infamous wealth tax.


  • Mike T

    I am curious to know how one can invest and know the bank/broker/etc will not simply remove money from clients accounts and then go into administration or declare bankruptcy.

  • Maria, London

    After such very steep increases in the oil ETFs – is this not a little late. Wise after the event?

  • N

    roll yield?
    Could you kindly point to a simple explanation that I could read and try and understand?

  • Changing Man

    I too am in favour of holding “stuff”! It worked for me in 2007 when I decided to cash in a third of my SIPP pension and buy a narrowboat! I watched the value of my remaining fund drop 20-30% in the crash of 2008 while the value of my boat didn’t! If there is something you want and you have the funds, go for it! Life is too short! Investing in financial products can be fun but remember why you are doing it!
    Now if I could only find some woodland adjoining the river with my own mooring…….!

  • Engineer

    How would you rate house builders or land banks in the context of stuff?