We’re eight years into a bull market that’s being fueled by accommodative monetary policies. Central banks all over the world are spewing cash like endless fountains of green. This flood of cash has worked to raise stock market values, but not for the right reasons. The right reason would be that companies are investing in new factories and more efficient production processes, and then hiring skilled, well-paid workers—but that’s not what’s happening.
What’s really going on is that corporations are taking money they can borrow for next to nothing and buying back their own stock. This artificially inflates the stock price, creating a windfall for executives, whose multi-million dollar bonuses are tied to that stock price, rather than any genuine company growth or even stability. And why not? By the time interest rates go up, leaving their company with a huge bank debt, and the stock market in free-fall, they’ll have golden-parachuted out and will be long gone.
ValueWalk's Raul Panganiban interviews JP Lee, Product Managers at VanEck, and discusses the video gaming industry. Q4 2020 hedge fund letters, conferences and more The following is a computer generated transcript and may contain some errors. Interview With VanEck's JP Lee ValueWalk's ValueTalks ·
So while we are seeing higher stock prices, they come without the underlying value and infrastructure needed to support future growth. Every economist and market watcher knows central banks can’t keep pumping out the cheap money, but so far the U.S. Federal Reserve has stood alone in talking about raising interest rates—and even the Fed’s been mostly talk.
Setting Us Up for a Protracted Bear Market
The flow of cash into corporations has warped stock prices, completely separating them from profits and fundamentals. You don’t have to be a financial wizard to see we have quite a large price premium that will have to be paid back. Already there are indicators pointing to a major stock market correction. The key warning sign is familiar to anyone who’s studied the 1929 crash, and that’s buying stocks on margin. Interest rates are so low investors can borrow money to buy stocks, and they’re doing so at near-record levels. That practice ended badly for the stock market last time and it will end just as badly this time.
This is Why You Diversify
Despite the fact we may be facing a steep correction and ongoing bear market, that’s not to say you shouldn’t stay invested, particularly if you’re in your twenties or thirties. Times like these remind small investors of why you diversify both your investment and assets. If you’re older, in your forties or fifties, now is a really good time to review your portfolio allocations and asset mix.
Do What the Wealthy Do
As you get older it’s wise to imitate some of the money habits of your wealthy friends when markets become troubled. The rich don’t work for wages, they work for assets. Tangible assets are the Golden Ticket when it comes to wealth. Commercial real estate, income producing multi-family housing units, timber and mineral resources are all examples of high quality tangible assets. While you may not be able to afford a vast stretch of Pacific Northwest woodlands, small investors have an even better option.
Liquid Hard Assets
Non-institutional investors, people like you and me, can hedge our portfolio value with liquid hard assets, like gold and silver coins. You may not have the time or resources to become a landlord or manage commercial real estate, but you can convert a fixed percentage of your wealth to physical gold and silver. Gold and silver coins offer the same wealth preservation as other tangible assets, with the added advantage that they’re readily accepted in the industry and easily converted to cash. Farmland and commercial real estate are tangible assets, but they take time to manage and they’re not liquid. Gold and silver can be stored in a sturdy safe or at a secure facility for a small fee and are far more liquid.
So, no, don’t sell all your stocks. Instead skim off profits from high-flying equities and convert some of that cash into investment-grade tangible assets. This is even more vital for soon-to-be retirees who can’t afford another body blow to their 401(k)s. With a mix of stocks, bonds and tangible assets, you rest easier at night knowing that a sizeable portion of your wealth is protected from a long bear market.