Friday, July 10, 2009

The 4 different Scenarios: Keeping Your Money Safe

I had a conversation with a friend earlier this week about how he see the market playing out over the next 5 years. My friend works in the financial sector and has worked for companies such as GE Financial along with having a finance degree. Some of our discussion was around all the different scenarios that we might see and how bad is everything. 

I also mentioned earlier in a post this week that I was thinking about purchasing some shares in some ETF's that short the financials. After talking with him about this, these are some of his main points and what he is doing with his money*.

*I do not suggest anyone follow his or my advice, we are forming our own opinion and this was just part of our conversation:

Not to say there isn't a chance for deflation or shorting bank stocks or real estate is a bad idea. I also believe banks are in much worse shape than they are currently showing on their balance sheets. I still believe that the government will continue to prop them up and won't let the bankin system collapse. That doesn't mean there's not going to be huge implications for the governments actions.

I think it makes sense to spread your bets around. I see 4 different scenarios that could occur:

Hyperinflation = 10%
Stagflation = 40%
Deflation = 25%
Back to Normal = 25%


Good Investments: Gold, most commodities, very little else. 
Bad investments: bonds, cash, most stocks


Good Investment: gold & staple commodities (oil, gas, food), utilties (maybe, in the 70s utitilies weren't a good investment). 
Bad investments: most bonds, most stocks, cash


Good investments: Cash, treasuries, high grade corporate bonds, high yield staple stocks (utilities), even gold has done well in this environment in the past and could potentially outperfm here as well.

Back to Normal: 

Good investments:Industrials, Tech, Energy, Banking (although I still wouldn't go long here). 
Bad investments: Gold will do poorly here

So my opinion for long term investing is to spread your bets accordingly based off the above. My target portfolio with a 5 year time horizon is:

30% = Precious Metals (includes actual bullion/metal and stocks of PM producers)
30% = USD Cash, FX Cash, Short Term Bonds (this is to hedge by PM trade, have an allocation to cash if there is deflation, and to have as ammunition when the market tanks again (so I can buy what I like)
20% = Energy/Agriculture both the actual commodities through ETFs and stocks (domestic and int'l stocks)
20% = Industrial, Tech, Healtchare, Utilities (domestic and int'l stocks)
He has studies the stock market and his investments for at least 2 hours a day. He has been doing this since he graduated college so whether he is right or wrong, he has put in the research. Again take all this with a grain of salt because no one really know what is going to happen over the next few years. What about me? Well, I still trying to figure it all out...I have a percentage going into my 401k and some going to my Roth IRA(mostly index funds) and the rest right now is sitting on the sideline in cash for possibly a down payment on a home.

So what scenario do you think is going to play out over the next 5-10 years? How are you protecting your investments? Leave me a comment.

1 comment:

  1. stagflation is looking likely. Hyperinflation would be the mathematically correct answer, but of course it's hard to imagine. Then again, so are the high interest rates that would be needed to stem it.

    Either way, foreign stocks are good, and div-paying stocks are good. I would be underweight most U.S. stocks, just pick and choose the best among agriculture, energy and materials.