If you were to go back to the start of the year and were asked to give what you thought would be the biggest sources of uncertainty that was possible for this year, you probably would have not have named Egypt, Libya and Japan. While I’ve been saying for years that there is plenty of global uncertainty, identifying ahead of time the actual form of it and what it will actually look like is very difficult.
Now, calling for a natural disaster similar to what just happened in Japan is of course impossible to predict, but middle east riots that were caused at least to some degree by food inflation was a little more logical to see coming – although nobody predicted Egypt to be the start of it.
The point here is that there are massive events that will always occur from time to time that you cannot predict or see coming. It’s important to stay focused on your long-term financial strategy before, during and after such events. If anything these events can provide some volatility that might bring buying opportunities.
The problem is that most people’s long-term financial plans are just to buy stocks on a regular basis indefinitely. As you know, this isn’t the plan I believe is correct. Now, there are some stocks that I do buy on a regular basis – they are my DRIP stocks that I put money into every month and have dividends reinvest over time. But I don’t buy the general market on a regular basis – which is what most people do via massively diversified portfolios.
I’m somewhat more selective on my overall positions that are adjusted based on some of the macro trends that I believe are in place. What are these trends? Well there is a global re-balancing that needs to take place between developed and developing countries. The US has an unsustainable debt, currency and standard of living where countries like China have the opposite. There will be a shift and re-balancing. As such, I want more exposure outside the US, and I want to diversify into non-dollars.
I make my living in dollars, so diversifying some savings and assets into non-dollars – whether it is foreign currencies or precious metals – isn’t exactly crazy although most financial advisers would tell you it is. I wonder why?
Furthermore, I see the U.S. as an economy with major structural issues that aren’t solved by cyclical solutions (namely liquidity and Fed easing). Growth will be hard to come by in America, and our policies are pushing us towards inflation. Stagflation is a very obvious result in my opinion.
Oh the whole, I want to be in defensive stocks, I want cash available to buy assets when volatility hits, I want to have exposure to commodities and precious metals to be hedged against inflation, and I want some exposure to resource-heavy countries and developing countries in Asia. Asia will have massive volatility, but long-term, their standard of living is going up (while ours is going down). Also, having some exposure to energy names is a good idea for both an inflation hedge and because energy demand is increasing in parts of the world like Asia.
A Japanese earthquake changes none of what I just said.