Tuesday, February 23, 2010

Wealth Preservation - The Road Ahead

The 80's and 90's were all about wealth accumulation. Now with a change of cycle, one must ask the question, "how do I preserve what I have?".

"The question that remains, if you get out of stocks and property, how do you hold your wealth? I favor a risk-averse approach. I would not hold debt instruments, and I would steer clear of most stocks, and be very suspicious of high dividend stocks, which may find it tough to maintain cash flow for dividend payments, if their cash flows wane in a shrinking economy. We are coming into a time when "cash will be king" once again. But cash must be held in sensible currencies, and in safe institutions. I would avoid stashing money in currencies of debtor countries which may be headed towards default. And bonds of those countries are even worse, since capital values will fall, if they indulge in aggressive money printing. This leaves the savings nations, like China and some other countries in Asia (like Singapore), and some special cases, like Norway, which have little or no debt, and big oil savings. I have some money held in US dollars for the time being, since that currency is benefiting from an unwind of dollar-carry trades as stocks and other assets are sold. We saw a similar upthrust in the dollar, when de-leveraging hit in 2008. When the dollar begins to falter, and commodities begin to bottom out, I may consider moving more deeply into the currencies of commodity exporting countries, like Canada and Australia. Even now, I continue to hold a decent part of my cash in C$. There is certainly a role for Gold in a low risk portfolio, since it can be regarded as the only "currency" which is not someone's else's liability. As long as it is held safely in physical form, there is zero risk of a credit default. You are not relying on someone's willingness to pay, or their vagaries of cash flows from tax collections or volatile business activities. I will take some risk, but it will be in a measured way involving a minor part of my portfolio in leveraged instruments like puts on the general indices and volatile junior mining shares. This way, I aim to protect the bulk of my portfolio, by leaving it invested in save haven instruments, but I may still be able to grow the size of my portfolio, by investing a minor part of the total portfolio in high-geared "bets" when opportunities appear."
Michael Hampton, AKA Dr.Bubb - February 10, 2010

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