One big lesson from America's 'tin decade' - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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One big lesson from America's 'tin decade' 

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In this issue:
» SEBI twists fund houses' ears once again
» Jim Rogers bearish and bullish on US dollar
» Pimco's El-Erian is a worried man these days
» US Parliament passes financial reforms bill, but then...
» ...and more!!


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00:00  Chart of the day
The end of year 2009 will mark the second worst performance for the US stockmarkets in eight decades. In fact, this would be the first decade of decline of them since the Great Depression of the 1930s. In fact, Jack Bogle, the founder of mutual-fund giant Vanguard Group, calls it a 'tin decade' after the 'golden' one of the 1990s.

* Representative of Dow Jones Industrial Average; Data for 2009 is till 11th December;
Data Source: Yahoo Finance

Nevertheless, this last 'tin decade' for US investors offers a great deal of learning for investors around the world.

The foremost lesson is that asset allocation works. Not the asset allocation that divides money between large-caps, mid-caps, small-caps, penny stocks, dot com stocks, or realty stocks (as US investors thought).

But an asset allocation that divides money between cash, stocks, bonds, gold, real estate, commodities, and international markets.

There is an important lesson for you in this. A proper allocation between these asset classes - cash, stocks, bonds, gold, and real estate - will go a long way in safeguarding your portfolio when any one of these asset classes crash.

While a single allocation does not work well for all kinds of investors, those with a 10-year horizon can have around 40-50% allocation to stocks. Another 5-10% can be put into gold, 5-10% in cash/liquid funds (for emergency needs), and 30-40% into property.

But always remember, periodically rebalance such an allocation. For instance, if your 40-50% stock allocation rises to 60-70% (possibly as the markets rise), then sell some stocks and add to other asset classes to bring your portfolio in line with your original allocation.

01:21
 
It seems like twisting the ears of a naughty child to warn him to mend his ways. But then India's mutual fund industry has always behaved like this naughty child, troubling the small investor to get his own way. One such naughty behavior from fund houses was to ask for no objection certificates (NOCs) from investors for switching their distributors. Not anymore, if the SEBI has its way!

The market regulator, in a circular to all mutual funds and asset management companies (AMCs), has instructed, "You are advised to ensure compliance with the instruction of the investor informing his desire to change his distributor and or invest directly, without compelling that investor to obtain an NOC from the existing distributor."

Let's call it another way towards investor independence and empowerment. But there will be a lot of hearts (distributors') that will burn!

02:05
 
Legendary investor Jim Rogers may be bullish on agricultural commodities, but when it comes to currencies, he believes a major crisis is waiting to happen in the next year or two. This will largely be propelled by the printing of paper money by governments.

From a long-term perspective, Rogers is bearish on the US dollar. However, he believes that the dollar will rally in the short term. What is more, he has increased his holdings in the currency. The reason for it is simple. While the dollar has its share of serious problems, other currencies are not exactly endorsed by strong economies either. And in the medium term at least, it seems unlikely that the dollar's status as the world's reserve currency will be challenged. However, we believe in the longer term, the case for a weaker dollar holds given the gargantuan debt that the US has amassed over the years.

02:49
 
Astute investor and the world's largest bond fund Pimco's CEO Mohamed El-Erian is a worried man these days. This despite the US' comparatively decent economic performance off late. He is worried that it will be very difficult for the US to sustain growth in 2010. This is because he opines that the growth in the second half of 2009 has been led by temporary sources like the government's stimulus and a restocking of depleted inventory by firms.

But the sad part is that these are not permanent sources of growth. Sustainable growth in the US can come only from the private sector - consumers and companies. However, these sources are unlikely to pitch in with their share of consumption anytime soon due to the tremendous headwinds of unemployment they are currently facing. Indeed these tough times do not look they are about to end in a hurry.

03:34
 
Ben Bernanke's attempts to combat the financial crisis have not gone down well with many members of the US Parliament. No wonder, it recently approved some of the biggest changes in financial regulation since the Great Depression. The big idea of these reforms will be to create an council to police systemic risk in the US economy. This would include crack down on hedge funds and credit rating agencies. The reforms also seek to set up a financial consumer watchdog agency.

These reforms are likely to not only restrict Wall Street profits but also ensure good governance. But then, as with all other reforms, the key will be implementation!

04:05
 
Oil prices dropped by 7.4% this week, thereby being the worst performer amongst various asset classes. Gold prices followed suit with a 5.6% decline. Among emerging markets, Brazil gained 2.5% while India closed the week almost at last week's levels. Among Indian stocks, those from the capital goods and metal sectors were the best and worst performers respectively.

Source: Yahoo Finance, Kitco
Note: Countries are representative of their benchmark indices

Talking about gold prices, and that of silver (which declined 7% during the week), we do not see this correction as changing their long-term trend, which is of rising prices. This decline in fact can be used by you to buy into these metals in small lots to build up an allocation of 5-10% of your total investment portfolio. Of course, these prices can fall more but you can then just average out your costs.

Data Source: Kitco

So, are you buying gold and/or silver at the current levels? Share your views

04:43
 
Anyways, despite falling sharply during the week, crude oil prices are already beginning to hurt Indian oil marketing companies (OMCs). This can be inferred from a recent statement given by the Petroleum Minister Mr. Murli Deora that these OMCs will incur a loss of over Rs 450 bn during the current financial year (2009-10). Unable to pass on the rise in crude prices to consumers in the form of higher prices of petrol, diesel, kerosene and LPG, the balance sheets of these OMCs we believe are heading towards extinction. That would mean a bigger hole in the government's (or our own) pocket!

04:59  Weekend investing mantra
"Hold no more stocks than you can remained informed on." - Peter Lynch
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29 Responses to "One big lesson from America's 'tin decade'"

Vijay Sam

Dec 18, 2009

Now is a good time to accumulate Gold via ETF

Like 

Manivannan

Dec 16, 2009

I do, am buying gold ETFs in a phased manner...

Like 

sajid

Dec 15, 2009

still we have to wait

Like 

UTKARSH VAISHNAV

Dec 14, 2009

no not now

Like 

sharad gupta

Dec 14, 2009

what are the gold ETF how one can buy them can ETF be traded in the market as shares, what are the good companies of gold ETFs, what should be the level of entry for gold ETF

Please suggest

Thanks

Like 

Ram

Dec 14, 2009

My comment refers to the statement: "Not the asset allocation that divides money between large-caps, mid-caps, small-caps, penny stocks, dot com stocks, or realty stocks (as US investors thought)." I think this statement is unwarranted and could have been avoided. There have been umpteen instance when your column has recommended asset allocation across different market-size caps and industry class.

Like 

sankar

Dec 13, 2009

One can buy gold using Gold ETF.. there are a score of them around, but how does only buy silver without getting in to commodity trading?

Like 

yash agarwal

Dec 13, 2009

I'll wait for some more correction
& then buy gold ETFs.

Like 

JOSHI JANAKKUMAR

Dec 13, 2009

GOLD IS BOUGHT WHEN A)THERE IS A FEAR IN THE MARKET B) HEDGE
AGAINST CURRENCY. IF IT FALLS BELLOW 20% THEN IT WILL ENTER IN TO BARRISH ZONE. IF IT IS A BUBBLE BURSTING IT MAY NOT RECOVER TO THIS LEVEL FOR LONG PERIOD OF TIME. ALSO IF INDIAN CURRENCY RECOVERS GOLD WILLBE AVAILABLE CHEAPER TO AN INDIAN.

Like 

manoj sikka

Dec 13, 2009

i want to buy gold & silver at the current levels so plz tell me the way when should i entire in which level and what was the target in the year of 2010 thanks

Like 
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