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

One big lesson from America's 'tin decade' 

A  A  A
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!!

------- FREE Newsletter -------
Dont't get tempted to gamble your savings on some 'hot tips'
Get The Honest Truth, the e-letter by Ajit Dayal, directly in your mailbox.
It's FREE. Sign Up Today.


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.

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!

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.

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.

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!

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

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
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Why NOW Is the WORST Time for Index Investing
August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)
August 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
This Company Beat the Business World's 'Three Killer Cs'
August 16, 2017
And what it has in common with beating the stock market too.

Equitymaster requests your view! Post a comment on "One big lesson from America's 'tin decade'". Click here!

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



Dec 16, 2009

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



Dec 15, 2009

still we have to wait



Dec 14, 2009

no not now


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




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.



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?


yash agarwal

Dec 13, 2009

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



Dec 13, 2009



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

Equitymaster requests your view! Post a comment on "One big lesson from America's 'tin decade'". Click here!


Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: Website: CIN:U74999MH2007PTC175407