Updated: May 6, 2021
What is investment and it's risk?
Investment is buying into a perceived value, given time, it should appreciate. In the last 40 years, if you have made your bet on either U.S. stocks or Asia properties, today, you will have an impressive net asset in value. Legendary investors like Warren Buffett and Li Ka Shing are the beneficiary of this super bull in both asset class. They are wise investors, but I believe they were also born at the right time. These super bull started in the 80s, Warren Buffett was 50 years old and Li was 52 years old, then, both of them have also accumulated wealth of investment experience and ready to grow bigger.
In the 80s Dow Jones was at about 900 points, today 27,000 points, that's about 34 folds return. Part of Asia in Singapore, a 4 room public apartment was $25,000 in the 80s, in the recent years, for the same type, the highest transacted price was at $860,000, that's also about 34 folds return.
The biggest risk to start your investment today - is this trend going to be continuous? If you were to start investing today in either U.S. stocks or Asia properties, the upside potential may be still there, but I believe the downside risks, it is even greater. Your fund managers will tell you this: "historically, invest into valuable stocks, it will only appreciate over time", however, their statistic were based on the last 40 years. If we could reference into the history, we will realized there are market cycles, a typical full complete cycle is about 60 years, this first half has stretched itself beyond it should be.
If you are a long term investor, we have to weight between the reward and risk, at this junction, it is too risky to be heavy on your investment or leveraging on the upside for the next few decades into the conventional asset class. Savvy investor do not just project on the potential upside, but they will also consider the potential downside risks.
Unconventional asset class for the other half cycle
Investing into asset may not just restrict to only stocks and properties, there are other asset class that maybe worth considering. In a bull part of the cycle, the conventional asset appreciates. How about the bear part of the cycle?
The world is moving into inflationary mode
You may agree with me, things are getting more and more expensive, it is not just in where you are living, but all over the world. Why is this so? This is called inflation and to make matters worse, many of our earned income cannot match-up fast enough with the speed of inflation, especially in the more recent years.
Another perspective of looking at inflation, it is the weakening of our currencies. With the regular "open market operation", QE among many central banks and other similar type in increasing money supply, our currencies have been diluted. Dilution means the action of making something weaker in force, content, or value. Our currency yesteryear can buy us lesser things today.
An unspoken asset hero
In 1970, Gold was at US$35, today US$1,500, it is a 42 folds returns. Hardly anyone talk about their outstanding performance, partially because it does not pay dividend and many do not understand about the fundamental of this commodity.
Precious metals, it is a commodity and a currency
In a pair of currencies, it is always a pair, it is never a single currency. For example in Usd/Sgd, if I am seeing a weakening of the Usd/Sgd, I am holding a view that Usd should be weakening against Sgd or respectively Sgd should be strengthening against Usd.
Yes, Gold is beyond a commodity, it is a commodity currency and it is a currency against the Usd. For this illustration, I will denote Gold as Gold/Usd. You could see from the following chart, since year 2000 US dollar index has been weakening, comparing the same period, Gold has been strengthening. As I recalled, each time when U.S. spent or when their currency being diluted or when investors loss confident with U.S., US dollar depreciates and Gold appreciates;
In year 2000 U.S. spent trillions in the middle east war, year 2008 it was the start of QE and between year 2018-2019 trade war has been triggered bu U.S..
During the Gold Standard years before 1971, we could safely say with some ratio, Gold is equal to USD, but after U.S. removed US dollar from Gold standard, since then, Gold is not equal to USD or it can also denote as Gold/Usd. This relationship, it is even more apparent in the recent years when U.S. spent more, print more money and when investor lost confident in them (refer to the above chart, Gold has start appreciating again since year 2,000 from a stagnation of between USD100 to USD200).
During trouble times, commodity asset appreciate
Above indicated a surge in the commodity prices during and after the financial crisis in 2008 (refer to the above chart, marked in white) . Then, investors rushed into commodity during that period. Gold rallied about 170% from around 700 , Hogs rallied 210% from around 43 and Cattle rallied 186% around 85.
It is about your conviction about the next financial crisis, no one can be specific on the date and time, but I know it will happen and this time in a much greater impact than the one we have seen in 2008. My preference is not to ignore to the fact that the global fundamental are in a chaos today, which will likely lead to higher inflation and in return to higher interest rate, but in a growth hampered environment.
The recent and maybe the coming ease by the Fed, it is a not a reversal, but a retracement from this uptrend that has been established since December 2015 for U.S. interest rate. Following are the two variables to keep watch on why the environment is still conducive for more rate hike:
a) An ever dilution of all our currencies and it's value that will lead to higher inflation.
b) Among nations and unions, many still trying to find a solution to strike balance between being equal and fair. The on-going trade war and with more tariff, things are just going to get more expensive because of taxes. Again, leading to more inflation.
Investment and trading strategy
If the two variables mentioned above are not being addressed and resolved, a continuous higher interest rate environment will be inevitable. It started on December 2015 from an unprecedented interest rate stagnation at 0.25% for 7 years. Since 2016, I started to reduce my asset both in stocks and properties, re-balanced it and have invested into some precious metals. However the wait lasted for 2.5 years, but it is worth the wait. Only in the last quarter of 2018, I started to see much appreciation and I believe it is only the beginning and I am expecting to see much more upside.
You may feel that you have missed out on this Gold run, consider looking at the laggard (refer to the above chart, marked in blue) for example like Hogs and Cattle, they did react well to the last financial crisis, but not this time yet. Keep searching into the unconventional assets that will rise together with higher inflation, there are plentiful of them. We just have to re-invent in the way we invest into asset class products or instruments.
For the short term, studies shown some commodities, their trough has been established and there is a potential for more upside, I will adopt a buy on dip strategy, instead of trading on both long and short side. Also, keeping track of the seasonal cycle and characteristic of each commodity.
I am making invest plan for the next 40 years. Perhaps the unconventional asset we had just discussed, they are now the U.S. stocks and Asia properties in the 80s. I am sure will live long enough to re-balanced my investment back to the conventional asset again.