Investing can be a distinctive form of training in self-knowledge and self-discipline. Focused study and sifting evidence are needed as is the ability to identify key themes most relevant to your situation as an investor at a certain stage in life. Not least, you must know yourself, and will get to know yourself better as you respond to what large forces and your own decisions do to your savings.
Contrarians may fight the markets a bit but one cannot fight oneself. You can make informed choices and acquire patience, usually the hard way, but cannot re-fashion yourself in a kind of existential photo-shopping. One can learn techniques for managing emotions (music, reading and gardening help many folks) but after the age of 20 or certainly 30, character is not too malleable except by trauma. Self-discipline and persistence come easily to some, less easily to others. To a degree these qualities can be increased or acquired but there is a fine line between self-discipline and trying to become someone you are not. As you come to know yourself your manner of investing may change and so may the nature of your holdings.
To elucidate these points, pertinent to all investment (and much else in life), let us examine the PMs (precious metals) for the volatility and artificial action in this sector puts passions to the test, tests discipline and within two years will show you the limits of your patience and resilience better than most other sectors. A few thoughts on what to buy, depending on your risk tolerance and time horizon are offered in the concluding section of this piece.
At one end of the investment spectrum are those who lack the time or temperament to plunge into the minutiae, thrills and shocks of investing. They by necessity put their boodle into broad coverage funds or ETFS (NYSEARCA:VTI), perhaps with an overweighting on health care issues (NYSEARCA:VHT), and let it ride. At the other end are those willing to invest a significant (greater than 5% or, with great patience, sufficient income and 2-year minimum time horizon, greater than 10%) portion of their stake in PMs. That will test your mettle, your sanity and ability to monitor many sources of information and relevant variables including relative currency strength, fiscal policy, geopolitics and more.
There are four main criteria to consider in shaping portfolio strategy:
* Your net worth
* Your income stream's scale and reliability
* Your time horizon (how often and how much you need to draw on your savings)
* Your risk tolerance or temperament, mainly your ability to tolerate volatility
The rest of this article will consider positioning for investors in different places in this matrix of factors given current and pending fiscal, governance and geopolitical issues.
For most people, the four criteria above interlace with and affect each other. A reliable income stream of reasonable scale should steadily increase net worth. A net worth greater than $2.5 million including owned real estate, autos and other significant property extends your time horizon by allowing invested income to compound and buffering mistakes or market surprises. Additionally, a higher net worth (if you are below 40 with steady income you can absorb more risk) and longer time horizon should increase, at least incrementally, one's ability to be patient and calm in periods of volatility, stagnation or plunges in asset values.
Fiscal and political policies, trends in governance, geopolitics and demographics affect everyone and provide basic hints about strategy and allocation. First point: economies are impaired by several factors: damaging demographic trends that reflect revolutions in values not likely to change and a steady drive in governance toward micro-management and control. This stifles growth and innovation, rewards conformity and in many cases systemic dishonesty and adds to uncertainty and fear. Interventionist fiscal policy that suppresses bond yields and causes lots of fluctuation simply by taper talk is an example. This mix of factors insures wealth destruction and consolidation, that is, a radical shrinking of the middle class: indeed, it is ongoing. The clutch for income portends increased volatility in markets distorted by policy and sentiment molded by those who own the media.
As a result, everyone needs to diversify asset classes as much as their means allow: rich people are not spending scores of millions of USD on single works of art or gem stones simply from nostalgia or flair: they are exchanging USD for radically different asset classes. The same can be said for PM bullion. Gold is the money of kings, silver is the money of gentlemen and of prudent investors at every level. Everyone should have some gold and silver bullion whether this means five or five hundred coins. Suppression of bullion prices facilitates this form of asset diversification. At current prices, higher net worth people should be, and probably are, buying silver and gold bullion in significant amounts.
Equities are riding on QE. Everyone needs to be in the market and aware of its nature and the pattern the artificial aspect of the rise has created. It is quite regular and tradeable as I showed here. Health care is the sector in which to be overweighted. It has risen +41.5% in a year and should be bought on dips. Because the profile of the latest surge is exceptionally steep, I suggest waiting at least for a couple of down days to add even the best individual companies like Starbucks (NASDAQ:SBUX), TJX (NYSE:TJX), Boeing (NYSE:BA), CBS (NYSE:CBS) or Disney (NYSE:DIS). One can play the PM and commodity sector with a diversified, sound company with great growth potential and staying power like Freeport McMoRan (NYSE:FCX): my archive of focus pieces on it is here.
Even those who choose 5% of less of a portfolio in PMs I believe would want, in addition to a diversified major like FCX a profitable, viable (multiple producing sites with good growth and management) mid-tier company like First Majestic (NYSE:AG), Endeavour (NYSE:EXK) or McEwen (NYSE:MUX), see my focus articles here and here. These companies now, like the entire sector are at very depressed levels and have enormous upside. Nearly all companies with rich sites and experienced management should double, triple or more in a year if the various price suppression tactics lessen, a big if, or changes in the world monetary system proceed as ex-USD trade and the shift of physical metal from West to East continues: all these points recently were noted by Robert Fitzwilson of the Portola Group. Accretion of 5x current prices in the best PM miners is plausible within 2 years: one needs patience, study and an income cushion to invest with that possibility in mind. Such gains may happen, some surely will, but do not make heavy bets against the managers of the system, against either their ability or will to find various ways to nuance prices, to lift or suppress sectors, companies or entire societies.
Those with less tolerance for losses, volatility or the stress that comes with monitoring individual issues would do well to complement a health care ETF or diversified stalwart like Johnson & Johnson (NYSE:JNJ) with a general market index with a weighting that suits their time horizon and means. For this path, Vanguard's Total Market Index supplemented by layered overweighting in Consumer Staples (NYSEARCA:VDC) or Discretionary (NYSEARCA:VCR) are the least time and stress-intensive paths. Again, at this point I would wait on significant buying of equities unless you plan to hold them longer than a year.
There is no one size fits all portfolio model of investing strategy. I continue to believe this cyclical bull is going to run through 2014: beyond that harsh surprises seem more likely then happy ones for most of us. This accentuates the merit of alternative assets like the Pure Funds Precious Gems ETF (NYSEARCA:GEMS) and buying some bullion coins. What is very likely, however, is that the socio-economic fabric of this nation and many nations will continue being torn.
For those thinking of buying opportunities and entry points, the chance for at least a 4-5% correction toward S&P 1720, even if briefly, are high. Given current sentiment and the possibility of increasing QE behind the curtains, it is possible that 1745, which we saw October 23 and again November 7 may be as low as the S&P will go. That would be only a 3.3% retreat and increase chances of a significant correction in the coming months. The debt ceiling will again need to be raised in February and there are signs the administration may add as much as $4-5 trillion in debt before then. That would take American Sovereign debt from $17.1 trillion to $21 trillion or more. GDP may rise but it will reflect government spending on itself which starves job creation and thus the economy. QE markets "will end in tears" as Egon von Greyerz of Matterhorn Assets recently stated but it is not clear that this will be in 2014. It might, but after that there are many ways that a major plunge could happen. History shows that modern governments have a taste for crises which rationalize extraordinary measures.
Still, one cannot afford to be out of these markets. Patience and methods for sustaining one's self-discipline in the face of turbulent and artificial action are paths we all must pursue. Try to find your way on the spectrum of possibilities outlined above. PMs remain the greatest value in the sectors and Health Care the surest play.
Disclosure: I am long EXK, FCX, VTI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.