• Buy why dividends? You’re too young to be an income investor!
• Don’t you know growth stocks are better suited for young people?

[The truth of the matter, however, is] that dividends aren’t just for Warren Buffett and retirees. Dividends have the power to support your goals of becoming independently wealthy. Here are three reasons why:

1. Dividend paying companies usually have excess monies available

Ironically, when a company dishes out billions of dollars to investors annually in the form of dividends, you might consider they’re making too much money. In other words, their profits are so juicy that they’re free to distribute excess cash to one of their most prized possessions: you, the shareholder. Target (TGT), [for example,] has been paying dividends every single year since 1965 raising their dividend annually for nearly 45 years. Now that’s commitment.

2. Dividend paying companies are usually here to stay

Sure, there are a few exceptions, but for the most part companies with long, sustainable histories of paying dividends [such as] 3M (MMM) [for example]…are more reliable than younger companies… You can think of it this way: who would you trust to show up to work tomorrow? Walter, the 56 year old janitor who hasn’t missed a day in 30 years or Slater, the 22 year old hotshot lawyer who just graduated from an Ivy league and landed a job at the firm? Reliability is often a difficult thing to come by in this day and age.

3. Dividend paying companies often have an excellent risk/reward profile especially when dividends are re-invested

Not a day goes by where I don’t hear someone refer to the last ten years as “the lost decade.” Well excuse me if things didn’t go well for growth investors, but owners of quality, dividend-paying companies, such as Johnson and Johnson (JNJ) actually fared quite well. In addition to a capital appreciation of about 12% over the last ten years, JNJ managed to grow their dividend from $0.20 a share per quarter in 2002 to $0.57 a share per quarter in 2012. Not too shabby when you think about it.

Conclusion

Though not necessarily as “sexy” as growth investing, take a look at the world of dividend investing and make sure to keep an open mind. I did, and what can I say but that I’m hooked!

*http://seekingalpha.com/article/318998-why-at-28-i-m-going-with-dividends

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The politicians will do whatever they find convenient, because there is no longer anything to stop them – not an electorate that is jealous of its freedoms and certainly not the Constitution, which is now just a playhouse for judicial imagineering. No one can know what’s coming next from the government and the financial system it has fostered, but for many of us there is an awful suspicion that we are not going to like it. Most Americans still have yet to stick a single financial toe across the border, but more and more are considering it [and in this article I outline 10 ways to internationalize your assets to provide you with some much needed protection as the future unfolds.]

So says Terry Coxon (www.caseyresearch.com) in edited excerpts from his original article*.

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The report’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Coxon goes on to say, in part:

Americans, by and large, run all their affairs within the confines of the U.S. [because] the U.S. economy is so large and so varied it is easy to assume that everything you want to do with your wealth can be done without crossing any borders People in the U.S….live with the habits and attitudes [they have] developed over generations…[as a result] of long experience with a government that was small and that generally practiced the rare virtue of following its own laws. In a happy exception to mankind’s experience with rulers, there was little to fear from it.

Stay at home is still the norm for Americans, but it’s a norm that is slowly fading [because]:

leaves a few thousand more people wondering how prudent it is to consign all their eggs to a single national basket.

Encounters with high-handed IRS agents and eager TSA gropers do nothing to ease that concern and for those who listen thoughtfully, the messages from our designated leaders and their would-be replacements only hurry the dawning sense of unease.

Specific worries include:

• exposure to predatory lawsuits, especially claims that could draw extra go-power by association with politically favored causes or legally favored groups;
• fear of where income tax rates might climb;
• the prospect of losing a family business in a regulatory battle or simply through estate tax;
• the fragility of financial institutions that have operated for forty years with the assurance that the Federal Reserve would rescue them from any folly;
• the possibility that a government desperate to protect the dollar from collapse might impose foreign exchange controls or capital controls;
• the memory and precedent of the forced gold sales of 1933 and
• the thought that a government floundering in deficits might start pilfering from IRAs and other pension plans,

but beyond the above specific worries, and perhaps more important than any of them, is the sense that from here on, anything goes.

The politicians will do whatever they find convenient, because there is no longer anything to stop them – not an electorate that is jealous of its freedoms and certainly not the Constitution, which is now just a playhouse for judicial imagineering. No one can know what’s coming next from the government and the financial system it has fostered, but for many of us there is an awful suspicion that we are not going to like it.

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Most Americans still have yet to stick a single financial toe across the border, but more and more are considering it…[They] want:

• to end their absolute dependence on what happens in the U.S.,
• to prepare for whatever is coming down the road, even though they don’t know what it will be and
• to be as ready as possible, even though their worries can only guess at what’s ahead.

Internationalizing your financial life means dealing with the unfamiliar…so it is best to start with the simplest measures, even if by themselves they don’t give you all the safety you’re looking for. Even from a simple beginning, what you learn with each step will make the next step easier to plan. Start with the first rung on the ladder of internationalization then climb [rung by rung] at your own speed to reach the right level of protection [you deem sufficient given your circumstances. Below are suggestions as to what a number of those rungs would entail.]

Rung 1: Coins in Your Pocket

Gold coins that you’ve stored personally give you something whose value doesn’t depend on the health of the U.S. economy, doesn’t depend on any financial institution in the U.S. and doesn’t depend on any U.S. government policy. Gold coins are portable and hold their value no matter where in the world you might take them…

It’s best to buy the coins for cash, for maximum privacy and there is a good reason to favor one-tenth-ounce gold Eagles. Gold coins mean readiness for troubled times; if you ever need to dispose of the gold in an informal market, it will be easier to do so with small-denomination coins that are widely recognizable and whose value matches the scale on which large numbers of people normally trade.

The premium on one-tenth-ounce coins (the price compared with the value of the gold content) is higher than on the larger coins – usually about 15% for the small coins vs. 5% for one-ounce Eagles – but the premium isn’t a dead cost, like a commission or bid-ask spread. The premium is a second investment; it’s what you pay for the packaging, and you can expect to recover it when you sell or trade…

Rung 2: A Foreign Bank Account

On its own initiative, the IRS can freeze any bank account in the U.S. without warning. The action might arise from mistaken identity, from an erroneous filing by some other taxpayer, from your failure to respond to an IRS notice in time or even from a postal error – and that’s what can happen without malice. Other government agencies have similar powers to act on their own, without giving you an opportunity to object in court…In principle, there are legal avenues for undoing a freeze or a seizure but you’d need a lawyer, and being suddenly penniless could get in the way of hiring one.

A foreign bank account protects you from being trapped in such a nightmare. The U.S. government can get to your foreign bank account eventually, because it can get to you but a lightning seizure is very unlikely because it would require a foreign government to override its own legal processes, which it generally wouldn’t be willing to do except in a grave emergency so, if your liquid assets at home were frozen, you would have cash outside the U.S. to fund the legal cost of untangling the problem.

A foreign bank account is also a way to step back from the uncertainties of the U.S. dollar, since the account could [and in some cases must]  be denominated in [the local] currency.

The U.S. government has seen to it that Americans are no longer welcome customers at foreign banks so forget about opening a Swiss bank account in your own name. However, if you apply in person (not by mail), you still can open a bank account in Canada. Be prepared to show your passport and to give the bank an original utility bill that confirms your place of residence.

Rung 3: Gold Abroad

The forced gold sales of 1933 were the work of an executive order signed by President Roosevelt. The purported legal basis for the order was the Trading With The Enemy Act, a legislative artifact of World War I. I have yet to find an explanation of how the authority for an order requiring Americans to sell their gold to the government at the government’s official price of $20 per ounce could be found in the Trading With The Enemy Act, but the fact that the enemy in question had gone out of business 15 years earlier didn’t seem to interfere with the legal logic.

The forced sale was a prelude to an increase in the official gold price to $35. The government’s reason for wanting that price rise was to gain leeway for a substantial, though limited, inflation of the dollar while keeping the dollar on the international gold standard. The forced sale was a way for the government, which operated in a political environment that still disfavored deficit spending, to capture the profit from the price rise. That profit would be a kitty for more spending without more borrowing.

Today there is no gold standard for the government to stay on and deficit spending isn’t something politicians especially want to avoid - they’ve promoted it as a civic duty, to stimulate the economy – so the depression-era motives for a gold grab don’t seem to apply.[That being said] you can’t listen to a conversation between two gold investors without hearing the seizure topic coming up…[and] there are two potential motives for the government to again treat gold differently from everything else:

1. If the dollar’s slide in foreign exchange markets threatens to turn into a panic, the government might want to use gold sales to foreigners to mop up foreign-held dollars – in which case it might see a need to mop up the gold owned by its own citizens.
2. At a visceral level, people who have centered their lives on government just don’t like gold. It’s an affront to the government’s authority to command and control and an insult to government’s supposed aptitude for solving economic problems…From their point of view every [troy] ounce purchased by an American is another tomato hurled at the political class and, [because] the purchasers still constitute a tiny minority of the voting population, what could be more satisfying and convenient for the politicians than to kick sand in the face of gold investors for being such lousy citizens?

[While] a new attack on gold ownership probably wouldn’t be a point-for-point reenactment of 1933 there are many weapons for mugging gold investors, [such as:] 

• a prohibition on gold ownership coupled with a prohibition on sales of gold to foreigners – leaving only…the government left to buy, and being the only bidder, it would be a very low bidder,
• a commandeering of privately owned gold, with token compensation,
• a super tax, say 90%, on gold profits, which would get the job done slowly or quickly if it were accompanied by a mark-to-market rule,
• or it could be something none of us has thought of yet.

Not only can’t we know the shape of a future gold grab, we can’t know whether or how the rules would touch foreign-held gold. Owners of gold stored outside the US would be a minority of a minority. Their gold wouldn’t be the low-hanging fruit – it would be higher up in the tree and more trouble to get to. That’s why, in a casino sense, gold overseas is a different bet and a better bet than gold at home…

Rung 4: A Swiss Annuity

A conventional annuity contract is a device for accumulating investment returns and eventually converting the value into a lifetime income. The investment return on an annuity from a US insurance company is tax deferred until it is paid out to you. If you buy an annuity from a foreign company, tax deferral is available only if the annuity’s value is tied to the performance of a pool of investments (a variable annuity).

Swiss annuities have long held a special place in personal financial planning. Such an annuity:

• is denominated in Swiss francs, i.e., it’s francs, not dollars, that are owed to you
• [is provided by an] insurance industry has a perfect record; policyholders have never been hurt by a default and a Swiss annuity
• is protected from the owner’s creditors if the beneficiaries consist of family members or if the owner has made a beneficiary designation that is irrevocable. For an owner in the US, that protection is not an impenetrable barrier to the winner of a lawsuit, but it is a barrier, and it makes the annuity a less-than-ideal prize for an attacker.
• earnings that are accumulating in a Swiss annuity are not eligible for tax deferral for a US taxpayer.

The Swiss franc is, like every other modern-day currency, just a piece of paper – not redeemable for anything, not even a piece of chocolate – but the Swiss National Bank has a remarkable record of restraint in issuing new francs, which means that the franc’s prospects for holding its value have long been rated better than for any other currency [which] I believe is still the case, despite the Swiss National Bank’s current policy of suppressing any further increase in the price of the franc. (In September, in order to save export industries from being crushed by the franc’s rapid appreciation against other currencies, the Swiss National Bank announced that it would purchase euros without limit to enforce a minimum exchange rate of 1.2 francs per euro – which implies printing enough francs to pay for those euros.} By itself, it is an inflationary move, but it’s not a suicide pact with the European Central Bank – the issuing authority for euros – and even if the ECB turns to a policy of rapid inflation, I would expect the Swiss National Bank at some point to decouple the franc from the euro and let the franc’s price rise so owning some Swiss francs, whether directly or through an annuity, is still a good step toward internationalizing your financial life.

Rung 5: Foreign Real Estate

Owning real estate in another country gives you a suite of protections that distinguishes it from other steps toward internationalization:

1. the property’s value will depend on economic conditions in the country you’ve chosen, not on what happens in the US. If the economy of the foreign country grows and prospers, there is likely to be a spillover effect on the market value of your house, apartment, farm or patch of land – regardless of what is going on in the U.S.
2. a foreign real estate investment would be hard to digest for any future capital controls imposed by the U.S. New rules could compel you to repatriate the cash you have in a foreign bank; rules forcing you to liquidate your foreign real estate and bring the money home would be another matter. Selling real estate isn’t quick or easy. How does the government compel an unwilling citizen to do what an eager seller often finds difficult to accomplish?
3. as a potential prize for a lawsuit attacker, foreign real estate is a stinker. If you lose a judgment, foreclosing on your foreign property would be difficult to impossible, since it would require the cooperation of the courts in the foreign country, about whose rules and procedures the attacker’s attorney probably knows nothing…Even if he persuades a court in the U.S. to order you to sell the property, the inherent illiquidity of real estate would give you plenty of opportunities for foot-dragging.

Where to buy? The whole world is open to you… which can be a problem. So many possibilities and no obvious place to start. One approach is to think about where you’ve been that you’d like to visit again or about some place you’ve long wanted to see. Plan to spend a few weeks there. Minimize your hotel hours, to maximize your exposure to the rest of the locale. Try to meet Americans, perhaps expatriates, who know their way around the place and who can point you toward a real estate broker who won’t try to treat you as an out-of-town sucker. [Mexico has many locales with large numbers of expats (Canadian, American, European). Read "Top 10 Places to Live and Retire in Mexico" for an insight into the best places to consider there.]

Buying foreign real estate isn’t for everyone. It requires a big investment in time and effort, but it could repay you with an asset that is low on the list of things anyone might try to take from you.

Rung 6: A Foreign LLC for Investments

A limited liability company organized under the laws of a foreign country is easy to set up and not too expensive. To bring the company into existence, you (or a service you hire) would file a simple form with a government office in the country you’ve chosen and pay a small fee. Then you, as the LLC’s Manager and you as the LLC’s owner, would enter into an agreement (the “operating agreement”) that would be the company’s governing instrument.

As the LLC’s Manager, you would open a non-US bank account or brokerage account in the name of the LLC and transfer your personal cash and investments to that account. Again as Manager, you would make all the investment decisions.

For a US person, a foreign LLC can be a powerful door-opener. It is welcome at many banks and brokerage firms where you personally would be turned away. This enables you to keep a wider range of assets outside the U.S., which puts more wealth beyond the reach of any arbitrary bureaucratic action. It also gives you investment choices that aren’t available at home.

Access to foreign investments and overseas financial services is reason enough to consider using a foreign limited liability company but it can do much more for you, although at the cost of some complexity.

Notice the fundamental difference between a foreign LLC and what is going on at the first four rungs of the ladder of internationalization. With the LLC, you no longer personally own the assets you are trying to protect; the company owns them. This makes the LLC a powerful device for reducing your family’s expose to gift and estate taxes and with the right provisions in the operating agreement, it can provide strong protection against loss to any malicious lawsuit.

If you are the sole owner of a foreign LLC intended for holding investments, you can and almost certainly should file an election for the LLC to be treated as a disregarded entity (indistinguishable from you for income tax purposes). If your spouse or anyone else is going to share in ownership of the LLC, the company can, and should, elect to be treated as a partnership for income tax purposes.

Rung 7: A Foreign LLC for Business

A business that operates outside the U.S. does even more than a portfolio of foreign investments to give you the benefits of internationalization.

By its nature, a foreign business lives in a different environment than a business in the U.S. Economic troubles at home might not touch it. If it’s a business that depends on your personal efforts, it’s even less attractive as a lawsuit prize than foreign real estate. Being foreign, it would be outside the range of capital controls in the U.S. And many of the financial institutions that might turn away an investment-owning LLC because it is owned by an American will welcome an LLC that makes or sells goods or services.

If you already have a business in the U.S. that has foreign customers or foreign suppliers, you may be able to relocate the business’s non-US activities to a foreign LLC. Internet-based businesses are especially amenable to internationalization.

Locating your business in a low-tax or no-tax jurisdiction, if it is practical to do so, can reduce your overall tax burden. In many cases, a foreign LLC that operates a business should elect to be treated as a foreign corporation for US income tax purposes. That can allow the business to reinvest its earnings while it pays little in current taxes and you personally pay nothing.

Rung 8: An International Trust That You Establish

Establishing a trust outside the U.S. is the strongest internationalization step you can take for yourself and your family. Doing so costs more than any other measure, but the costs needn’t be prohibitive if your goal is to move $500,000 or more into the safest structure possible. What you achieve is a very high level of protection from aggressive lawsuits, from potential capital controls and from the possibility of a gold seizure. The trust also puts your wealth in a far better environment for income tax planning and for estate planning.

To serve the purposes of protection and tax savings, an international trust is irrevocable (you can’t simply call the institution you’ve chosen as trustee and say you’ve changed your mind) and discretionary (meaning that the trustee has a responsibility to decide when to send a check to you or to any of the other beneficiaries you’ve included). Putting assets under the control of a trust company under such an arrangement is a big step. You’re not going to do it unless you’ve done the homework needed to understand how and why you can count on the trustee to handle the assets in the way you intend.

Getting the protection and tax savings of an international trust doesn’t require you to give up management control of the assets. The trust can be limited to owning just one thing – an LLC that you manage. The LLC owns all the investments, under your supervision as LLC Manager.

If you establish an international trust, it will be tied to you for income tax purposes but at the end of your lifetime, it will completely disconnect from the US tax system. At that point, for the benefit of your survivors, it becomes…

Rung 9: An International Trust Someone Else Established

Being a beneficiary of an international trust established by someone other than a living US person is as good as it gets. It’s not linked to you by any transfers you’ve made to it, and you don’t have a determinable percentage interest in it (since it’s a discretionary trust) so, until you actually receive a distribution, there is nothing for you to report, nothing for you to pay tax on and nothing a potential lawsuit creditor can hope to take from you. Having no living connection to the US, the trust is far beyond the orbit of any conceivable US gold seizure or currency controls.

One Toe over the Line

It’s a long way from walking into the local coin shop and buying a few one-tenth-ounce gold Eagles to setting up a trust in a foreign country but the distance isn’t nearly as great as you might imagine, and it will get shorter both in fact and in apprehension with each step you take.

As you move up the ladder, you’ll learn about the reporting requirements for US taxpayers. Rung 1 (gold coins in your pocket) entails no reporting, nor does Rung 8 until you actually receive a distribution. Rung 5 (foreign real estate) also is free of reporting requirements, at least for now. Under rules in effect now, or soon to come, everything else covered in this article entails filing a form with the U.S. government. The most reliable way to make sure that you stay within the rules, so that internationalization adds to your safety and not to your problems, is to let your accountant know what you are doing. Keep him informed, so that he can see to it that all the reporting requirements are satisfied.

*http://www.caseyresearch.com/articles/simple-plan-keep-your-assets-safe-out-control-government

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The stock markets in the West are stealthily forming bullish ascending triangle patterns and looking for breakouts while those in the East are all in a downward spiral. The U.S. dollar is also in an ascending triangle offset by gold which is transitioning from a bump phase to a run phase and could possibly fall as low as $1,420 per troy ounce in this correction. Silver is already in the run phase and could drop down to as low as $26. Analyses of these markets suggest that the Year of the Water Dragon may be full of surprises. Let me explain my determinations with a number of graphs.

So says Dr. Nu Yu (www.fx5186.wordpress.com/) in edited excerpts from his latest Market Weekly Update.

 Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The report’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Dr. Yu goes on to say in more detail that:

While the world focuses on the debt crisis of western nations, the U.S. Dollar and the U.S. broad stock market index (see here), major European stock market indexes such as the German DAX Composite (see here) and the London Financial Times Index (see here), and even the Brazilian Bovespa Stock Index (see here) in South America are stealthily forming bullish ascending triangle patterns and looking for breakouts, Asian stock markets are behaving differently this time. Major Asian market indexes like the Shanghai Stock Exchange Composite (see here), the India Bombay Stock Exchange Index (see here), and the Tokyo Nikkei Average (see here) are all in a downward spiral.

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In my opinion, the greatest threat to long-term and retirement investors is the wealth-destroying triple combination of monetary inflation, asset deflation, and inflation taxes. Fully understanding [these factors] is absolutely essential for financial survival because history shows us quite clearly that when all three of these major wealth destroyers are working together in the real world then conventional investing methods cannot withstand the destruction of investor wealth that occurs.

So says Daniel R. Amerman, CFA (www.danielamerman.com) in edited excerpts from his original article*.

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Amerman goes on to say, in part:

Inflationary Illusion Fooling Investors

The last time the U.S. endured the combination of sustained high unemployment and high rates of monetary inflation 70% of stock investor wealth was annihilated…by three distinct wealth-destroying forces – asset deflation, monetary (price) inflation and “inflation” taxes…As shown in the graph below, in yellow, the Dow Jones Industrial Average reached 919 in May of 1968, and by August of 1982, had fallen to a level of 777, for a loss of 15% [but, given the decline in the value of the dollar over that 14 year period, had declined by 70% in inflation-adjusted terms - yes, -70%].

This 70% decline in the value of what our assets would buy for us was entirely real, but to this day, many don’t realize just how bad it was – because inflation in prices was hiding deflation in investment values. The 65% plunge in the value of the dollar “hid” the great majority of the 70% plunge in the value of stocks, with most of the surface value of the Dow index by 1982 consisting of dollars that were worth far less than what they had been before.

Even though long-term asset deflation of 70% (in real terms) was the result of the last time we had persistent high unemployment coupled with inflation, many investors and newspaper readers…may [only] recall three powerful bull markets when the Dow repeatedly flirted with the “magical” 1,000 mark. Each surge filled innumerable financial columns with the hopes that the good times and a long-term bull market had returned again, with those hopes being quickly dashed as the market repeatedly proved unable to sustain itself above the 1,000 level. The reality is that there never were three bull markets, but rather only an inflationary illusion fooling the public.

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Indeed, when we look closely [at the graph below], instead of seeing three peaks, we will see three historical object lessons in how destroying the value of money can hide the destruction of the value of assets – and repeatedly fool the headline writers along with much of the investing public. The cold reality of the Dow adjusted for inflation is shown in blue. [As you can clearly see,] there aren’t three interim peaks, but merely a market moving steadily and powerfully down.

The “bull market” that peaked in January of 1973 when the Dow hit 1,047 – was in a reality a fall to Dow 848 (asset deflation in inflation-adjusted terms), that was masked by the dollar being worth only 81 cents when compared to May of 1968 (monetary inflation). Inflation had created an almost 200 point illusion in the Dow.

The “bull market” that peaked in September of 1976 at 1,014, really represented the Dow falling by over 300 points – translating to asset deflation of 34% – which was hidden from savers by the illusory profit created as a result of the dollar dropping in value by 40% (monetary inflation).

The cruelest illusion of all was the “bull market” of April of 1981, when the Dow finally reached 1,024 because the real value of the market had fallen to 399, and a 57% destruction of the purchasing power of investor assets was being entirely hidden by the 61% destruction of the value of investor dollars.

Three Wealth Destroyers vs “Perfect Timing”

In my opinion, the greatest threat to long-term and retirement investors is the wealth-destroying triple combination of monetary inflation, asset deflation, and inflation taxes.

One of the most common investor approaches to a truly difficult market is to attempt to “outrun” the problems [by making] better decisions than the rest of the public, and making so much money that the problems can be overcome and wealth kept intact – but it begs the questions: “How well does that work in practice and just how good do you (or your financial advisor) have to be?”

To answer the above question, we will go back in history and assume that through the use of a time machine (or peerless skill, or uncanny luck) we did a perfect job of long-term market timing during an environment of asset deflation and monetary inflation.

Aided by this time machine, we put every dollar we had into the market on May 26, 1970, when the Dow closed at 631. What makes this day remarkable is that 631 is the lowest level the Dow index closed at between November 20, 1962 and September 12, 1974. It was the single cheapest day to buy stocks over an almost 12 year time period, and at the time, the lowest that stock prices had been at in more than 7 years. Perfection.

Subject to the conditions that 1) as long-term investors we need to be in the market ten or more years, and 2) that we want to stay within the 1968 – 1982 period of sustained asset deflation and high monetary inflation, we instruct our time machine to find the best possible place to sell. This turns out to be April 27, 1981, when the Dow closed at 1,024.

April 27, 1981 was the single highest close for the Dow index between January 22, 1973 and October 19th, 1982. So we buy in on the exact day with the lowest stock prices in an almost 12 year period, and we sell everything out on the exact day with the highest prices over an almost a ten-year period. Double perfection!

So then, how did we do? As shown in the following graph which begins on our purchase date and ends on our sale date – our time machine allowed us to get the best possible results in a thoroughly bad market. If our returns had exactly tracked the Dow between when we bought and sold, our perfect timing would have taken us from 631 to 1024, for a 62% price gain in the midst of one of the worst markets in memory.

A whopping profit indeed before we adjust for inflation, that is, so let’s do that. A dollar on our sale date in April of 1981 was only worth 43 cents compared to what it was worth on our purchase date in 1970. When we adjust for what our assets will buy for us – we have Dow 440, not Dow 1024. So even the perfect timing delivered by our time machine leads to a 30% asset deflation loss in real terms, not a 62% gain.

The Internal Revenue Service did not “see” these losses, however, but on the contrary, was quite impressed by our remarkable investment prowess. Moreover, taxes were higher back then (when we confine ourselves to federal income tax rates, we truly are at a low-level now compared to much of the modern era). Assuming we were in the highest income tax bracket, and traded often enough to pay ordinary income tax rates, then given that the average top income tax rate over that period was 68%, this means that we would have paid out 267 in taxes on our 393 gain. These taxes on effectively non-existent income are known to economists as “inflation taxes”, and during times of high inflation, they can be devastating.

Subtracting out real taxes on imaginary income leaves us with Dow 757 in after-tax terms, and Dow 325 in after-inflation and after-tax terms. Thus, even with our quite unrealistic assumption of absolutely perfect market timing – which allowed us to radically outperform almost every other investor in the nation – we still lost almost half (48%) of the purchasing power of our net worth.

Lessons Learned & Implications For Today

The most important takeaway from our time machine scenario is not about 1970 or 1981, but about what investors face today. The world has changed immensely, and there are numerous reasons to fear that long-term asset deflation could become reality again. [In addition,] with the fight for survival of both governments and banking systems who are each effectively dependent on rampant monetary creation and deficits without end, the chances for major inflation have never been higher in the modern era.

History does show what can happen next for an entire nation with a deeply troubled economy. For more than decade, the markets and investor wealth can be dominated by the deadly combination of:

1. a crippling destruction of the purchasing power of investment assets;
2. a masking of this asset deflation by the destruction of the purchasing power of money; and
3. this masking then generating illusionary “profits”, upon which taxes have to be paid, which then compounds the damage.

Moreover, history shows us quite clearly that when all three of these major wealth destroyers are working together in the real world then conventional investing methods cannot withstand the destruction of investor wealth that occurs across the nation and over the long-term. Even when we used the extraordinary assumption of perfection in timing – there was still a crippling asset price loss in real terms. Of course, real world investors who didn’t have the benefit of assumed perfect timing lost even more money.

There was very little one could do about it then – nor is there today – so long as conventional investment practices are followed. The placid and theoretical world of ever-compounding retirement investment accounts simply doesn’t have a chance when it runs into the real-world triple wealth destroyers that aren’t factored into the usual financial modeling assumptions.

Current Asset Deflation Risks

To illustrate the extent of the danger for today’s investors when the destruction of the value of money (price inflation) hides the destruction of the value of assets (asset deflation), let’s begin by assuming that the markets experience a 70% real loss, which is the same as what actually happened between the late 60s and early 80s. Using a round 12,000 for the value of the DJIA, that would translate to an index value – before inflation – of 3,600. However, we must keep in mind that much is different now when compared to this previous bout of asset deflation:

• Europe was not then on the verge of possible financial system failure, thereby endangering US export markets, jobs and corporate profits in a globalized world,
• Asia had not yet become the world’s global manufacturer, so there were still plenty of US manufacturing jobs to be filled when the economy did turn around and
• there was an oncoming surge of free-spending young adults – the Baby Boomers – who as consumers and workers would turn the US economy around in the early 80s. This has now been reversed, with the Boomers becoming a retirement juggernaut who will be simultaneously selling massive amounts of investments into the markets, even as consumption drops with a graying population.

Given how much has changed between then and now, a mere repeat of that historical 70% decline might be considered a conservative assumption.

Deficits, Debt, “Printing” Money & Higher Inflation

As with asset deflation, when it comes to monetary inflation, there are powerful and unfortunate differences between the 1970s and now:

• The Federal government has had its credit rating downgraded because it is borrowing an amount equal to almost 10% of the total economy each year, with no end in sight, to fund ever-growing government promises…
• The global financial system is being kept from collapse only by the direct creation of trillions of dollars and euros which are being passed to financial institutions and other favored corporate insiders on non-market terms.
• Impossible promises to retirees and government bond buyers from effectively bankrupt governments are all too likely to be repaid with inflation.

[Given the above,] if we assume not the historical 65% destruction of the value of money, but a 90% destruction (which is consistent with the Federal Reserve’s creating dollars by the trillions out of thin air), then a dollar becomes worth ten cents.

As shown below, if a dollar is worth ten cents, then the Dow must rise (in nominal terms) to 36,000, in order for it to be worth 3,600 in real terms.

The blue in the graph represents reality, with the purchasing power of our investments dropping 70% from our starting point on the left, to our ending point on the right. However, when we include the “Illusion Of Inflation” in the column on the right, and we combine 70% asset deflation with 90% dollar destruction – then we get Dow 36,000.

Paying Whopping Taxes While Our Net Worth Is Destroyed

The illustrated “fiery” rise from Dow 12,000 to Dow 36,000 is spectacular indeed, and is likely to draw the full attention of a keenly interested party – a near bankrupt government that is starved for tax revenues.

It is government fiscal and monetary policy that creates inflation; however, inflation losses are not recognized under the tax code. So we owe taxes in full on the 24,000 point rise in the Dow – even though we actually lost 70% of the value of our investments in that rise.

Eventually, excessive borrowing and high inflation will restrict the government’s ability to use deficit financing, and either the spending must plummet as generations-worth of promises to retirees are broken, or taxes must be substantially increased – or both. [Read Stealth Taxation in the Form of Financial Repression is Coming! Here’s Why – and How (2) and (3) Get Ready to be Financially Conscripted – and Face a Lower Standard of Living!] Unfortunately, “wealthy” investors who have been enjoying apparently “stratospheric” profits on their retirement investment accounts are likely to be all too tempting of a target, resulting in rising tax rates even while retirement tax shelters are restricted or eliminated.

The above chart assumes a 50% tax rate, which while above recent rates, is still nowhere near the highest levels seen in modern history. Keep in mind that the government may be near bankrupt, with tens of millions of enraged voters not getting the promised level of Social Security benefits they thought they had been paying for with decades of payroll taxes.

Paying 12,000 in taxes on a 24,000 point “profit” leaves us with the after-tax equivalent of a 24,000 Dow. When we adjust for a dollar being worth ten cents, we are left with Dow 2,400 - which is only 20% of what we started with.

As the chart shows, the illusionary “profits” caused by inflation allow the government to use inflation taxes to take a third of the value of the assets we had left after the 70% bout of asset deflation, leaving us with an 80% loss on our savings.

Alternative Assets

A very attractive alternative for many investors is to try to bail out of paper money and paper assets altogether, and to seek to preserve wealth through tangible assets such as gold, silver and real estate. Tangible assets can indeed form the cornerstone of successful investment strategies in difficult markets, but unfortunately (and ironically), most popular inflation hedges don’t take inflation taxes into account.

My article, Gold is NOT a Perfect Inflation Hedge! Here’s Why (1), explores how a combination of high inflation and rising tax rates can devastate what looks like a perfectly executed gold investment strategy, turning what on the surface appears to be spectacular profits into a major loss on an after-inflation and after-tax basis, with the government effectively ending up with much of the gold investor’s starting net worth. Precious metals are a great way to survive and even profit during financial turmoil – but inflation taxes have to be fully taken into account in the strategy.

The Triple Redistribution Of Wealth

Fortunately, there are solutions, but to apply them one must first recognize and understand the redistribution of wealth.

While the value of the paper dollar did fall by 65% between 1968 and 1982, and the inflation-adjusted value of the paper wealth that is the Dow did fall by 70% – the real wealth of the country as a whole did not fall by 65-70% because real wealth is not paper assets in a bank or brokerage account, but is goods and services. Real wealth is the economy and the collective standard of living.

The economy did not fall, but rather it grew by a cumulative total of 25% in inflation-adjusted terms over those 14 years, with an annual average real growth rate of about 1.6%. The 70s and early 80s were deeply troubled, and this real annual growth rate is about half of the long-term average for the modern era in the United States – but the sum total when it comes to real wealth was still positive.

Now, we know that tens of millions of savers who were relying on their savings to at least partially pay for their standard of living did necessarily see a fall in their standard of living – because what their dollars could buy for them did fall by 65%, and after-tax interest payments were not nearly enough to keep up.

However, this dramatic drop in potential standard of living was not experienced by the nation as a whole. Rather, there was a redistribution of wealth with:

• tens of millions of people benefitting (albeit accidentally in most cases) from the destruction of the paper dollar that was severely hurting tens of millions of savers
• millions of stock investors experiencing asset deflation which ravaged the purchasing power of their portfolios because the value of paper wealth in the form of stocks fell by 70% – while overall real wealth grew for the nation – there was indeed a major redistribution of the relative rights to enjoy this real wealth of goods and services and
• inflation taxes being the primary redistributor of wealth. Government economic policy creates inflation, while government tax policy pretends inflation doesn’t exist. Through taxes, massive illusionary profits are taken from savers and investors, and redistributed by the government.

When inflation is high, inflation taxes act as lead weights, pulling down and even crippling the performance of most inflation hedges and general investment strategies alike – until one realizes that they are created by government blindness to inflation. On a fundamental level, this blindness necessarily opens the door to out-of-the-box counter-strategies for achieving profits that are in plain sight – even if government tax policy doesn’t see them.

Turning Wealth Destroyers Into Wealth Creators

When we put the three wealth destroyers on the left column together – as has happened in the past and may be happening again in the near future – then conventional finance strategies simply can’t cope, not once we look at results in after-inflation, after-tax and after-expense terms.

The end result is the impoverishment of savers and investors by the tens of millions and, because the great majority of paper assets are held by older people, it will be the Boomers and their parents who pay the highest costs, as wealth is redistributed away from them.

I have spent many years studying these issues and exploring different possible solutions. And over these years I have become convinced that the best answers can only be found by first finding the right questions to ask.

The essential questions aren’t about how to achieve the best results within a conventional long-term investment approach because, as we saw with the “perfect timing” scenario, when broad and powerful wealth destroyers are moving against all investors, and on a sustained basis, then coming out ahead becomes excruciatingly difficult, and in the real world will likely only be achieved by a tiny fraction of investors.

Instead, let me suggest that the better approach is to move to a more fundamental and holistic level, taking into account everything that determines our net worth and standard of living, and asking the three following questions:

1. How can I personally and realistically change my financial profile and strategy so that monetary inflation redistributes wealth to me and the higher the rate of inflation, the higher my real wealth grows?
2. How can I change my strategy so that asset deflation becomes a profit opportunity rather than a wealth destroyer?
3. How can I take advantage of the government’s blindness to inflation and reverse inflation taxes, so that instead of paying real taxes on imaginary income, I am (perfectly legally) paying imaginary taxes on real income?

The above are not the usual questions but they are the essential questions because when we successfully answer all three questions, and reverse all three wealth destroyers, then we have three wealth creators instead. These wealth creators can then build upon each other, and transform our personal finances in a time when paper wealth is being destroyed all around us.

Finding the best answers means stepping well outside the usual approaches, and this will mean that our strategies may look radically different from those around us…

If sustained high monetary inflation, severe asset deflation and inflation taxes do return then those who do nothing to change their “normal” financial profiles will face year after year of pervasive and sustained financial pain, with declining wealth and potentially declining standards of living…

* http://danielamerman.com/articles/2012/Dow36C.html

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Related Articles:

1. Gold is NOT a Perfect Inflation Hedge! Here’s Why

Almost any traditional inflation hedge [such as gold, silver as well as real estate, stocks or whatever,] has difficulty in reaching the break-even point on an after-inflation and after-tax basis when we take into account the pervasive problem of hidden “inflation taxes”…If our future is one of high inflation, then whether and how you deal with inflation taxes may be one of the biggest determinants of your personal standard of living for decades to come… Why? Because government fiscal policy destroys the value of our dollars and government tax policy does not recognize what government fiscal policy does, and this blindness to inflation means that attempts to keep up with inflation generate very real and whopping tax payments, on what is from an economic perspective, imaginary income. [Let me illustrate that fact with three examples and suggest some remedial measures.] Words: 3085

2. Stealth Taxation in the Form of Financial Repression is Coming! Here’s Why – and How

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3. Get Ready to be Financially Conscripted – and Face a Lower Standard of Living!

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If you are tired of spending hours each week searching for articles that are extremely informative, relatively brief and very well-written, then go no further than munKNEE.com. Here is a sampling of articles posted on the site this past week related to what is happening in the economy and the gold market and what the future holds for its price.

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) searches for the latest articles of substance to be found on the internet each day and then presents them in an edited and abridged fashion to provide the reader with a fast and easy read. Also of major merit is the “Related Articles” section under each article that provides titles, introductory paragraphs and hyperlinks to other articles to provide as much additional insight into the topic of interest as you have time for without having to search elsewhere.

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Below are introductory paragraphs and links to the articles posted on munKNEE over the past 7 days just on investing and the economy to help you become better informed and better able to make sound investment decisions for you and your clients.

1. munKNEE.com’s 12 Most Read “How Best to Invest in the Stock Market for Maximum Returns” Articles in 2011

This post initiates what I hope will become a multi-year tradition of listing what, according to munKNEE.com readers, were the most read articles in 2011 on how best to invest in the stock market from a broad, and therefore timeless, perspective. Introductory paragraphs and links to each article are provided in descending order of popularity. Enjoy!

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This is not a typical bull market. Gold is not rising in value, but instead, currencies are losing purchasing power against gold and, therefore, gold can rise as high as currencies can fall. Since currencies are falling because of increasing debt, gold can rise as high as government debt can grow. Based on official estimates, America’s debt is projected to reach $23 trillion in 2015 and, if its correlation with the price of gold remains the same, the indicated gold price would be $2,600 per ounce. However, if history is any example, it’s a safe bet that government expenditure estimates will be greatly exceeded, and [this] rising debt will cause the price of gold to rise to $10,000…over the next five years. (Let me explain further.] Words: 1767.

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Our work with Gold is based on a “Model” off the late 70’s Gold Bull that has been replicating nicely since we started the Fractal Work with Gold back in 2002 and 2003. Short-term volatile moves in Gold, as we have seen over the past weeks, do not affect our projections based on the model, leaving the expectation of a move in Gold up to $3,000 into mid-year intact as outlined in our previous article entitled Gold Tsunami: on the Cusp of $3000+? Words: 996

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The traditional view of portfolio management is that three asset classes, stocks, bonds and cash, are sufficient to achieve diversification. This view is, quite simply, wrong because over the past 10 years  gold, silver and platinum have singularly outperformed virtually all major widely accepted investment indexes. Precious metals should be considered an independent asset class and an allocation to precious metals, as the most uncorrelated asset group, is essential for proper portfolio diversification. [Let me explain.]

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The report’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Cornwell goes on to say in the executive summary, in part, that:

The objective of this report is to clearly demonstrate that one of the most important investment categories; namely, precious metals (gold, silver and platinum) otherwise referred to as bullion, is an asset class of its own. We further assert that modern portfolio managers, investment advisors, the financial institutions employing these investment professionals [and individual investors alike] are, in fact, not sufficiently diversifying their client’s [or their own] investment portfolios by excluding bullion as an asset class.

The definition of diversification maintains that a balanced investment portfolio should have various weighting of asset classes to be properly balanced. Furthermore, modern portfolio theory tells us that having the right mix of uncorrelated assets reduces risk and improves return. If that is the accepted practice, then why is it that the most negatively correlated asset group to stocks and bonds; namely, precious metals or bullion, has generally been excluded from portfolio diversification as an asset class?

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By bullion, we are referring to physical bullion and not a bullion proxy such as the ownership of a mining stock or other alternative investment vehicles. Over the last ten years, the three precious metals have outperformed equities by almost 4 to 1. Where traditional portfolio thinking went wrong was in the belief that commodity stocks and other alternative investment vehicles were a sufficient proxy for physical precious metals in investment portfolios but, in reality, these so-called proxy investments come with significant risks disassociated with the ownership and performance of bullion itself and do not necessarily provide a direct or pure asset class exposure to commodities. We contend that these so-called proxy investments add uncertainty as they expose portfolios to other variables such as financial, geographic and political risks which are then layered on top of operational and management issues.

Physical bullion, on the other hand, provides:

1. insurance against failure of all other investments,
2. better liquidity and is the only asset class (excluding cash) with
3. a positive correlation coefficient with inflation, and therefore, the only asset class that can provide
4. protection from a systemic crisis.

[It is unfortunate that] many investment professionals do not recognize precious metals as an asset class. A direct physical allocation in precious metals provides an unencumbered investment with (i) no counterparty risk, (ii) sufficient liquidity for large investors, and (iii) no dependence on management for performance.

Once accepted that physical precious metals or bullion should be included as a necessary asset class, then the question becomes just how much of an allocation to physical precious metals or bullion is adequate. Based on historical efficient frontiers, Ibbotson found that including precious metals moderately improved the efficient frontier… [but] based on forward-looking efficient frontiers, Ibbotson found that including precious metals led to asset allocations with higher Sharpe ratios. It was determined that investors could potentially improve the reward-to-risk ratio in conservative, moderate, and aggressive asset allocations by including precious metals with allocations of 7.1%, 12.5%, and 15.7%, respectively.

The allocation to precious metals does not come at the expense of any single asset class, but rather from a reduction in several asset classes. Ibbotson suggests that the unique risk and reward profile of precious metals may make them a useful diversification tool in strategic asset allocations moving forward.

We contend that precious metals should be considered an asset class of its own and that an allocation to precious metals, as the most uncorrelated asset group, is essential for proper portfolio diversification.

DIVERSIFICATION = UNCORRELATED ASSET CLASSES

Modern portfolio theory tells us that having the right mix of uncorrelated assets reduces risk and improves return. A theory pioneered by Harry Markowitz back in 1952 states that it is possible to construct an “efficient frontier” of optimal portfolios offering the maximum possible expected return for a given level of risk. One of the critical aspects to this theory is achieving the right mix of investments or, in other words, ensuring portfolio diversification with uncorrelated assets.

Merriam-Webster defines diversification as to make diverse or to balance (as an investment portfolio) defensively by dividing funds among securities of different industries or of different classes. Investopedia.com defines diversification as a technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.

Diversification strives to smooth out unsystematic risk events in a portfolio so that the positive performance of some investments will neutralize the negative performance of others. Therefore, the benefits of diversification will hold only if the securities in the portfolio are not correlated.

A portfolio that is invested in multiple instruments whose returns are uncorrelated will have an expected simple return which is the weighted average of the individual instruments’ returns. Its volatility will be less than the weighted average of the individual instruments’ volatility. An investor can reduce risk simply by investing in many unrelated instruments.

TRADITIONAL THINKING IS WRONG

Most pension fund managers, investment professionals [and individual investors] use asset allocation to achieve diversification in order to reduce risk, maximize performance, and thus responsibly manage their client’s [or their own] funds. The traditional view of portfolio management is to break portfolios into three asset classes, most commonly being stocks, bonds and cash, as sufficient to achieve diversification…Surprisingly, the Canadian Banks Forum is an exception…more accurately defining asset allocation as a process whereby an investor diversifies his or her portfolio with different classes of assets such as stocks, bonds, cash investments, foreign currency, real estate, collectibles, precious metals, natural resources and life settlements. Furthermore, it states that because markets are constantly changing due to the unstable global climate, investors should examine and, if necessary, rebalance their asset allocation annually.

Stocks, bonds and real estate assets provide an ongoing source of value that can be determined using the present value of future cash flows. Commodities are consumed and do not provide a source of ongoing cash flow but rather a single cash flow. Currency, fine art and collectibles are not consumed and do not generate income but do have a monetary value.

The traditional portfolio management thinking has resulted in a surprisingly small allocation of investment funds to precious metals. Pension fund holdings, for example, have less than a 1/3 of 1% in gold, of which half of that amount is invested in gold mining stocks. What should then become obvious is that traditional portfolio managers using the only three asset categories have clearly not sufficiently diversified client portfolios. Not only have they ignored one of the best performing asset classes, but additionally they have missed out on the concept of adequate diversification keeping in mind that precious metals were the most uncorrelated asset class. What is even more amazing to us is that the major financial institutions still adhere to this traditional investment philosophy.

GOLD, SILVER & PLATINUM OUTPERFORM

Portfolio managers, investment advisors [and individual investors] should be concerned [with the fact that] gold, silver and platinum have each singularly outperformed several major widely accepted investment indexes over the last 10 years. From September 30, 2001 to September 30, 2011, for example,

• silver was up 557.25%,
• gold up 451.3% and 
• platinum up 257.99% compared to only
• 60.62% for the R/J CRB index,
• 38.67% for the MSCI World (excl. USA) Index,
• 35.85% for the 30-year bond  and just
• 33.16% for the DJIA.

Investment professionals have a fiduciary responsibility to meet liabilities for pension plan and future retirement needs of their clients by managing the funds in a responsible and competent manner. To completely ignore the best-performing asset category for such an extended period clearly shows that client portfolios have not been sufficiently diversified. (We do not include bullion proxies such as mining and metal stocks as they expose portfolios to other risks not associated with the performance of bullion itself.)

PRECIOUS METALS OFFER NEGATIVE CORRELATION

A study done by Ibbotson Associates (“Ibbotson”) in 2005 determined that precious metals are the most negatively correlated asset class to stocks and bonds. This study clearly made several important conclusions that portfolio managers and investment advisors, including those at large banks and trust companies, seem not to understand or choose to simply ignore.

The goal of the study was to explore the role of precious metals in a strategic asset allocation. An investment in commodity-related stocks does not provide a direct or pure asset class exposure to commodities, specifically precious metals. Therefore, the risk and return characteristics of a direct physical investment in precious metals were explored by constructing an equally weighted composite based on gold, silver and platinum bullion spot prices referred to as the Spot Precious Metals Index (“SPMI”). The SPMI was then used as a proxy for the precious metals asset class. The Ibbotson study examined the 33-year period from February 1971 to December, 2004 and determined that the correlation coefficients of annual total returns of various asset classes compared to the U.S. large cap stocks was as follows:

• precious metals:** -0.10
• cash: 0.04
• US intermediate bonds: 0.22
• US long-term bonds: 0.28
• international equity: 0.59
• US small-cap stocks: 0.79
• US large-cap stocks: 1.00

**equally weighted composite index using gold, silver and platinum bullion for comparison

Particular detail in the Ibbotson study was directed to the correlations of precious metals with the traditional asset classes and how this relates to diversification. The Ibbotson study pointed out that for the period 1926 to 1969, the correlation between annual total returns for U.S. stocks and U.S. bonds was an attractive -0.02. However, more recently, the U.S. stock market and U.S. bond market correlations have increased. This is reflected  in the 10-year rolling correlations from 1970 through 2004 that ranged from -0.03 to 0.80. Ibbotson concludes that the primary method for improving the risk-return characteristics of the efficient frontier is to expand the opportunity set of available asset classes.

Ibbotson found that over the 33 year period, the equity asset classes outperformed the other asset classes and that the overall performance of the SPMI was closer to the fixed income asset classes. While the standard deviation of the SPMI was quite high in isolation, according to modern portfolio theory, it is the interaction of the asset classes with each other that provides diversification.

Of the 33 years of annual data, there were nine years that the U.S. Large Cap stocks had negative returns. During this period, the SPMI had the highest average arithmetic return. Furthermore, there were six years that an equally weighted portfolio of traditional asset classes had negative returns. The average arithmetic return of the portfolio of equally weighted traditional asset classes for these six years was negative 3.5%. For the same six years, the arithmetic return of the SPMI was a positive 13.4%. Precious metals provided positive returns when most needed.

Of the seven asset classes metioned above the precious metals asset class is the only one with a negative average correlation to the other asset classes. As we point out, low correlations between asset classes are essential for diversification.

PRECIOUS METALS OUTPERFORM MAJOR CURRENCIES

All major currencies have declined relative to gold over the last ten years [by +80%]. Cash is not ‘king’ as many portfolio managers would have you to believe. From this perspective, the best investment strategy for long-term investors seeking low risk secular growth potential is unencumbered physical bullion.

PRECIOUS METALS OFFER INFLATION PROTECTION

Ibbotson found that from May 1973 to August 1984, the SPMI was the top performing asset class with the longest run of any of the asset classes in the 11-year period. During the low inflation period, the SPMI had the lowest compound annual return, however, during the high inflation period, the compounded annual inflation rate was 8.6% and the SPMI had the highest compounded annual return of 20.8%. For the period studied, Ibbotson found that precious metals provided a substantial hedge against inflation. Excluding cash, precious metals is the only asset class with a positive correlation coefficient with inflation and, therefore, the only asset class that can provide protection from a systemic crisis.

*You can access the full report from Catalyst Equity Research here.

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 1. Which Gold and Silver Assets (and How Much) Should You Own?

It is no longer a matter of whether or not you should buy gold and/or silver but, rather, which type of investment(s) and how much. You don’t need a lot but you do need some – and here’s a primer on just what type of investment vehicles are available and recommendations on just how much you should buy. Words: 1086

2. It is Imperative to Invest in Physical Gold and/or Silver NOW – Here’s Why

Asset allocation is one of the most crucial aspects of building a diversified and sustainable portfolio that not only preserves and grows wealth, but also weathers the twists and turns that ever-changing market conditions can throw at it. However, while the average [financial] advisor or investor spends a great deal of time carefully analyzing and picking the right stocks or sectors, the basic and primary task of asset allocation is often overlooked. [According to research by both Wainwright Economics and Ibbotson Associates and the current Dow:gold ratio, allocating a portion of one's portfolio to gold and/or silver and/or platinum is imperative to protect and grow one's financial assets. Let me explain.] Words: 1060

 In proclaiming buy-and-hold investing to be dead, the pseudo-experts masquerading as financial advisors have abandoned the fundamental principle of investing: buying undervalued assets – and then giving those assets the time necessary to mature. Instead, these charlatans have forced their clients to become short-term gamblers. Worse still, they are now consistently steering their clients toward the worst possible asset-classes, stocks and bonds,  rather than the best ones [simply because they do not] understand the fundamental conceptual difference between risk and volatility. In a market populated by panicked lemmings, we cannot avoid volatility. However, we can and must reduce risk – which begins by building an allocation of history’s true safe haven asset, precious metals. [Let me explain more about what risk and volatility are and are not.] Words: 1080

So says Jeff Nielson (www.bullionbullscanada.com) in edited excerpts from his original article*.

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The report’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Nielson goes on to say, in part:

[I am surprised at the large number of] investment professionals who confuse risk and volatility… regularly and thoroughly confusing these two concepts to the point where the terms are treated as being virtually synonymous. This has resulted in the flawed investment principle that reducing volatility will (and must) reduce risk. Such thinking is deeply misguided, and following it has dire consequences for investors.

As always, logical analysis starts with a definition of terms…[and] while it can be very difficult to quantify risk, defining it is simple.

• Risk, in the context of investment, is the probability that something you purchased will end up being worth less than what you paid for it when you decide to sell it.
• Volatility, on the other hand, is a concept that is as easy to recognize in the real world as it is to define. Volatility is a purely mathematical concept that refers exclusively to “deviations from the mean.” If we establish a trend line for the price of any good/investment (often referred to as a “moving average”), volatility refers to the average size of the bounces in price on either side of the trend line. Most importantly, to the long-term investor, volatility is a small factor in assessing risk.

[The above] definition of volatility…provides us with little insight about risk because it implies absolutely nothing about the direction of the trend for any particular investment, i.e. up or down. A particular investment can have a volatility of effectively zero, while marching steadily down to a valuation of zero [and] the closest and most obvious example of [that] would be the U.S. dollar…

Who in the world is currently reading this article along with you? Click here

The Federal Reserve has a statutory mandate to “protect the dollar” from risk, i.e. avoid a loss in value. In practice, however, the Federal Reserve has never followed that mandate; instead, it has sought to only minimize volatility [and, as a] result, the US dollar has steadily lost 98% of its value in the 98 years of the Fed’s existence,. The Fed has succeeded in minimizing volatility throughout this long plunge in value, however, it has failed utterly in protecting dollar-holders from risk, or economic losses caused by holding dollars.

While no one likes the idea of a 98% loss, when spread over the very long-term, this may not seem like much of a risk but, when we note that 75% of this decline has occurred just in the last 40 years,… [we realize just how great it is]. When we further note that this alarming rate of currency-dilution has accelerated significantly just in the last five years, this should be enough to cause all rational dollar-holders to break into a cold sweat. [In spite of that, however,] clueless media drones still point to the dollar as a “safe haven,” basing this suicidal advice entirely on the fact that the dollar represents (relatively) low volatility – while totally ignoring the absolute risk represented by an accelerating, century-long trend toward zero.

Living in an era where all of our governments have promised to race each other in driving the value of their currencies to zero, i.e. participate in “competitive devaluation”, we finally see the truth about the world of fixed-income investments – the banker-paper in which they are denominated is plummeting in value at an unprecedented rate, providing guaranteed losses rather than the supposed guaranteed income. It is the perfect illustration of the cliché of “the lobster in the pot.” The lobsters (bond-holders) may be entirely comfortable thanks to the slowly rising temperature of the water; however, they’re still going to end up boiled alive!

Indeed, it is widely reported that real interest rates have never been so negative at any time in history [as they are now], i.e. that the gap between what we earn in interest and what we lose in currency-dilution (i.e. inflation) has never been this large at any time in the history of modern markets. Precisely how do the largest guaranteed losses in history on fixed-income investments represent a “safe haven”? This is something that the “experts” conveniently omit in dispensing their foolhardy advice.

Conclusion

Readers must realize that there are viable options. Once we correctly define the problem, namely protecting ourselves from risk, we can begin to understand the solution to our problem: looking for investment products and opportunities which minimize risk rather than merely minimizing volatility.

The obvious starting point in such a search is to look at bonds vs. bullion. In the case of bonds we have U.S. interest rates currently at almost 0% (i.e. no return) and virtually no hope for price appreciation. On top of that, they are denominated in US dollars, which have already lost 98% of their value – and are losing value even faster every day. Fiat currencies also have their own track record: a 1,000+ year history of always going to zero. We immediately see how utterly irrelevant it is that US Treasuries are a relatively low-volatility asset. There is no less-volatile number than zero!

Then there is bullion: a real safe haven. In the case of gold and silver, we have an asset class with a 2,000+ year track record for preserving wealth, combined with a 10+ year up-trend in this recent bull market. That is safety. What more can I say!

*http://dylanhart.net/2011/12/risk-volatility-and-the-dollar/?utm_source=rss&utm_medium=rss&utm_campaign=risk-volatility-and-the-dollar

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3. Protect Your Portfolio By Including 15% Gold Bullion – Here’s Why

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