Monday, 20 February 2012

Investment Horizons

In these uncertain times where should we place our hard earned savings? Gold, commodities, bonds, equities, cash, fine art, wine, antiques, property?

I've never seen such a divergence of opinion in this regard, and perhaps the best policy would be to spread the risk a little and diversify into all these asset classes while we ride out the storm.

I myself however, am 100% equities, and this is why.

1) Cash: quite frankly with inflation running so high and interest rates so low cash is a VERY bad place to have your money as its purchasing power will gradually be eroded over time. Rather than being risk free there is a 100% risk of you losing money. Stay away!

2) Gold: there are lots of gold bugs out there right now; including many governments who are buying up all the gold they can, thus driving up the price to extreme levels. Gold is a traditional 'safe haven' asset, and with all the unprecedented loose monetary policy (Low interest rates/Quantitative easing) going on, the price may have a lot further to run.
However, gold has no real underlying value to underpin the price. Sooner or later when economic conditions improve, people will move out of gold en masse and the price will collapse. Add this to the fact that gold produces zero returns (actually might cost you quite a bit to store) and it appears to me that far from being a safe haven it is actually one of the more risky asset classes out there right now. I may be proved wrong in the short/medium term because i have no idea how much further the price will run, but eventually the price will collapse and there will be tears (not mine).

3) Bonds: usually bonds play an integral role in any portfolio, and can be a very useful asset class for those with a lower appetite for risk but who also wish to protect their savings from the ravages of inflation. However because of the recent mass intervention into bond markets by western governments the world’s bond markets have become very unstable and unpredictable, bond yields are also very low in those countries that are perceived as safe, therefore offering minimal protection against inflation right now.
Corporate bonds might be a better option in these times as they are offering higher yields and also it could be argued that the issuing companies are at far less risk of default than the countries in which they are listed.

4) Property: There is a strong case for UK property based on supply/demand dynamics. However when interest rates finally start to rise again, affordability will hamper the market. It is my personal view that housing will significantly under perform equities in the long term and that you would be better off buying shares in certain house builders than houses themselves.

5) Fine art/ Antiques/ Vintage Wine: I'm sure that there is some serious money to be made in these asset classes. As countries like China get increasingly richer these luxury goods will probably skyrocket in price due to the extra demand. I myself know nothing about fine art and antiques though, and would probably just drink the wine. So I won't be bothering with any of these.

That leaves equities, my asset class of choice. I think if you have an investment time horizon of 15+ years then equities are definitely the place for your money for the following reasons.

a) They are very cheap. The FTSE is currently trading at a P/E ratio of about 11, that's significantly lower than its long run average of 14/15 so there is easily potential for 30% + gains before shares become even fair value.

b) Dividends are high and getting higher. Many mega cap stocks such as Vodaphone, AstraZeneca etc are throwing off 5/6% dividends, this coupled with a huge potential for capital gains means that double digit annual returns should be possible over the long term for investors in these businesses.

c) Companies on the whole are in very good shape. Yes there have been casualties of the recession, especially in High St Retail where firms are suffering from strong competition from internet based firms. But many firms, such as the two mentioned above, are sitting on huge cash piles and have overseas exposure so are capitalising on emerging markets. It should be noted that most companies in the FTSE100 do more business abroad than they do in Britain, so an investment in a UK FTSE100 tracker for example, offers substantial global diversification.

So there you have it! If you have a long enough investment time line to see through the global debt crisis and the Euro zone single currency problems, then equities are probably the asset for you. This is my view and any further crisis that drives down the price of equities I will view as a buying opportunity.

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