Feeling peaky
Most developed country stock markets are pretty expensive at the moment; and some are extremely expensive.
Modern portfolio theory suggests that since no-one knows more than anyone else you should just hold your nose and keep on investing regardless.
That's one strategy - and it can work over the very long run - but it can also leave your portfolio exposed to significant downside risk, and long periods of under-performance.
The Kelly capital growth model is the proven route to the greatest wealth creation over time, and it suggests that you should bet more when the odds are in your favour.
Investing isn't like a game of chess when you must move in turn or in a given sequence - you're free to do whatever you like, whenever you like...which sometimes includes doing nothing.
Following the cues from the Kelly model - which implies thinking about your investment strategy as a series of bets - I have about half of my liquid funds in cash or cash equivalents at the moment, waiting for bigger and better opportunities to come around, as they always do.
Consider that Buffett is presently holding a lazy US$128 billion cash pile, and, by the way, he's been able to compound his wealth faster than you, I, or anyone else!
How?
By waiting for high expected returns.
How?
By waiting for high expected returns.
That's great, but how else can you continue compounding your wealth and moving forward at a time when expected returns from most developed markets are so poor?
Seeking value
One way is to invest in countries or indexes where stock markets have been dramatically thrashed out of favour (e.g. Pakistan, as I discussed here), meaning you can generate high income alongside potential for strongly rebounding capital growth.
Note that I obviously don't know anything about your personal situation, so this isn't advice - it's just what I'm doing.
Along similar lines, unsurprisingly the two best performing stock markets this year have been Russia and Greece, generating huge returns as they rebound.
Another approach is to invest in out of favour sectors, such as energy or utilities.
If you're going to apply this contrarian logic to investing in individual companies rather than ETFs, then the big, systemic companies may be safer, to reduce the risk of permanent loss of capital.
Out of favour
Other obviously unloved candidates right now would probably include British American Tobacco and Imperial Brands (which, for now at least, has a massive double digit yield), but for personal reasons I don't invest directly in tobacco, alcohol, or armaments companies.
The UK has a few other stocks offering decent value, and in my portfolio I have one of the major petroleum producers, which has been paying a dividend yield of about 6½ (plus another petroleum company listed on the NYSE yielding 7½).
I also have one of the largest Korean chaebols, one of the country's three giant telcos that has terrific wireless coverage and service, and will continue to throw off a tremendous income stream.
This approach keeps half of my liquid funds busily compounding away while I await better opportunities when developed markets revert lower.
Financial independence
Financial independence
If you can learn the skills to generate 12 per cent (or ideally higher) returns safely on your capital, on average through the cycles, then of course this greatly reduces how much capital you need to be financially independent.
What the finance industry doesn't tell you about the widely touted 'average' 7 to 8 per cent returns from stock markets, is that if you suffer a 50 per cent drawdown it will take you years and years to make the 100 per cent returns you need just to get back to where you were (if you ever do).
In other words the buy-and-hold strategy works some of the time, but not all of the time (though it may still suit some younger investors with a long runway and with regular amounts of capital to invest).
In other words the buy-and-hold strategy works some of the time, but not all of the time (though it may still suit some younger investors with a long runway and with regular amounts of capital to invest).
But then, it's not really in interest of the finance industry to tell you that part, because they typically generate their fees from funds under management.
My sixth published book is due out in the new year via Wilkinson Publishing, co-authored with my colleague Stephen Moriarty, and is aimed at people wanting to take charge of managing their own money in this low interest rate environment.
Great things about managing your own money include the vast advisory and fund management fees saved, and also that the invaluable skills you learn will stay with you forever.
Based upon 8 key principles, it is a timeless investment strategy for all markets...not just bull markets, when anyone can make money.
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For some related posts on why average returns can be so misleading, see here and here.
I also discussed the sequence of returns risk in this post here.
My sixth published book is due out in the new year via Wilkinson Publishing, co-authored with my colleague Stephen Moriarty, and is aimed at people wanting to take charge of managing their own money in this low interest rate environment.
Great things about managing your own money include the vast advisory and fund management fees saved, and also that the invaluable skills you learn will stay with you forever.
Based upon 8 key principles, it is a timeless investment strategy for all markets...not just bull markets, when anyone can make money.
---
For some related posts on why average returns can be so misleading, see here and here.
I also discussed the sequence of returns risk in this post here.
