Go On The Offensive To Preserve And Build Wealth
By Carl Delfeld I’ll never forget the advice given to me by the CEO of UBS Wealth Management. “Carl, remember one thing. Before you go out and tell your clients all the ways you’re going to make them money, try your best not to lose any.” And it’s certainly great advice for all of us, as we move into 2016 amid a high degree of uncertainty. Preserving capital should always be the top priority. Unfortunately, the traditional defensive strategy recommended to achieve this goal – high-quality bonds and blue-chip U.S. stocks – is obsolete. Rising interest rates could crush many bond portfolios, and you only have to look back at the global financial crisis to see how many blue-chip stocks lost almost half of their value in the blink of an eye. Let me share with you two potential ways to protect wealth that you won’t hear about anywhere else. They’re also a low-risk method to build wealth. One: Don’t Become Too Cautious and Defensive First, as any coach or smart sports fan will tell you, the surest way to lose a game when you’re ahead is to become too cautious and defensive. Why? You tend to become tentative, miss opportunities, and lose the initiative that built your success in the first place. It’s far better to intelligently stay on offense, pushing ahead while trying not to take any undue risks. Above all, this is never the time to try the same old tired plays. Two: Stay Open-Minded and Flexible This brings me to the second way to protect wealth, the need to be open-minded and flexible. For the past four or five years, a portfolio of U.S. stocks has performed pretty well, with the flat 2015 being an exception. Part of this is due to the Fed pumping in massive amounts of liquidity, no competition from zero rate Treasuries, and to the strong U.S. dollar attracting capital and hurting international stock returns. It certainly appears to me that at least some of these trends are reversing. This means you need to adjust by taking off the blinders and searching for new opportunities. And to do this you need to fight “home bias.” Going on the Offensive Home bias is the tendency to invest too much in your home country, thereby neglecting overseas opportunities. It’s very comfortable to lean towards the home stock market, but it is contrary to a cardinal rule of investing – not putting all your eggs in one basket. It’s also at odds with common sense since no one country – even America – has a monopoly on growth, value, and progress. When you really think about it, this home bias is puzzling. Why should the world’s best companies with the best growth prospects just happen to be in America or wherever your home country happens to be? I say this even though I’m a huge believer in America’s future, if we pursue the right policies and reforms. This is why I authored a book outlining what needs to be done: Red, White & Bold: The New American Century. In short, where a company is based means less and less; and what it does, and how well it performs, means more and more. And this is especially true for emerging markets, as the value of their stock markets plays catch-up with their contribution to global economic growth and share of the global economy. Just take a glance at these two great charts by JP Morgan. U.S. stock markets still dominate, accounting for 46% of the value of all listed companies in the world, while Japan’s share has dropped sharply from its peak in 1989 at over 30% to just 8% today. The share going to emerging markets has grown sharply, but still sits at around 13%, even though emerging markets represent 83% of the world’s population and half of global growth and output. This big gap between the value of all emerging-market-publicly traded companies and their contribution to global growth and the world’s economy will narrow – and this is your opportunity to cash in. The key trend to watch is the direction of the U.S. dollar. If the greenback levels out or begins to pull back in early 2016, undervalued emerging markets will really take off. The strategy you use to take advantage of this mismatch is critical. Stick with high quality companies showing good growth and strong balance sheets. Diversify across many countries, while favoring those that respect private capital, rule of law, a free press, and open markets. Most importantly, always use a trailing stop-loss to minimize risk. It’s the best hedge to protect your portfolio from a weaker U.S. dollar, and it could really supercharge your returns in 2016. Original Post