Julian Phillips argues that, while no one knows what the future holds, it is likely that the future will be tough and gold will be a good thing to hold.
Four investors with jobs outside the investment field are looking at what they should invest in so they can achieve a comfortable retirement. What should they consider when looking ahead?
These four investors have different ages, one with 10 years to retirement, one 20, one 30 and one forty years to go before they can sit on a beach, grey haired, a little portly, next to a surf board, feeling they can now age gracefully, comfortable and without fear for their financial future. That’s what so many believe the future holds for them. But is that realistic, can investments produce that for him?
Without a shadow of a doubt the thought of living in a paid-off house is the first target. After all in forty years house prices should have risen at least 20 times over their original cost [that’s excluding interest payments, which may have reduced that figure to 10 times] At least that was until the ‘credit crunch.’ But unlike most investments, you have the added benefit of living in that house over that period so you may not consider that so much of a cost as an inevitable overhead.
Without any expertise in the investment world, all such investors feel that they must now consult an investment sage to whom they assign the full responsibility of making money from the money given to them and achieve the desired results. Consequently, these four usually turn to financial advisors for advice so they can start/continue a Pension fund targeting their retirement date.
This is where it gets complicated, because the extent and variety of choices there can be mind boggling. So what should these four do? Well, they have to keep their eyes wide open and focused on their goal. Most investors don’t do this. They ask someone else to do it for them.
So many schemes charge substantial fees for operating such funds for you, and they invest in funds or shares that only pay a portion of their profits to investors. Thus there is a tremendous dilution of return on investment before it reaches these four hard workers. So they have to look hard at the structured investment scene to find what they want to achieve their objective.
He who ignores history is doomed to repeat it
A look back in history is pertinent here. Take your home. If it was bought 40 years ago, as we said above it would now cost [ignoring interest and financing cost] a twentieth of the price you would pay for it today. You may well say that the materials used and the land it stands on, are not rarer today than in yesteryear, so why has the price risen? The supply of houses has not reduced to an expanding market, has it? No, what has really happened is that the cost of money has dropped. Take a look at inflation over the period and compound it to today and you see that your average house has not increased in value, but the value of money has dropped.
We all tend to believe that rising prices mean rising value, it’s such a comfortable illusion. But it isn’t true. It is true that different investments perform better or worse than others at different times and the nifty investor who buys at the bottom and sells at the top can outperform everybody else. But this character is a bit of a myth too.
Back at the time of the Wall Street crash in 1929 one investor did do this and sold out just before the crash, whereas his friend didn’t sell until the fall was half way through. But then he heard that his friend thought he was so accomplished that he thought the market had hit the bottom when it was half way down and bought in again and was wiped out.
Don’t confuse short-term performance with long-term aims
But today, we hear of funds that returned so much last month and so much the month before. These short-term performances are not to be confused with planning investments for the long term pension plan. We even hear of “Day-traders” who become investment stars. Often they share the same fate. Even the most accomplished traders succeed with only 52% of their trades and burn out very young.
Our four investors planning for retirement cannot look to the shooting stars of the investment world as a guide. Day traders at home often lose their savings, simply because they are not emotionally suited to investment world. As one investment sage said, “The real test of greatness for investors is not how they navigated market cycles during that time, but whether they can adapt to historical changes occurring over half a century or longer.” This is what our investors for retirement must do.
The wise investor who keeps his emotional health, plans for the long-term and maximises total return. This means he reaps capital gains and income from investments.
This demands that we understand the investment seasons. There are long periods when a particular investment climate keeps going, like the huge bull market that lasted from 1985 to 2007, when the future looked so rosy that prices of houses, shares, etc, reached peaks that seemed as though the ‘summer’ investment climate would last forever. Even the most famous of investors needed the right climate.
But then a “credit crunch’ appeared that devastated house prices and equity markets and brought on a cold winter investment climate that also looks as though it isn’t going to go away either. Before we grasp another investment illusion that isn’t true, we have to look at the causes of these ‘seasonal’ changes.
Are they in fact seasonal or structural changes? Do they touch the very root of values and confidence? Are they changes that deeply affect the future worth of investments that we are going to rely on?
What do we mean and how can we understand what will happen to investments looking forward? Well, take a look at gold. 43 years ago gold stood at $35 an ounce. Today, after falling back from $1,900 an ounce it stands at $1,570 a rise over that time of 44.86 times. It doesn’t do anything but sit there. So why is it special?