When markets are “good” for a long time you should always at least give it some thought. Your thought should not be driven by the specifics of your particular situation, like objective and time frame of your personal wealth, but should rise above it all. There is always time to derive a unique strategy later on.
A question I’ve been asking myself recently is What is the most desirable investment alternative today, and why? It is not a trick question, nor one that necessarily requires an in-depth study. It does require some amount of common sense, and being relatively up-to-date with the events of the last five years. You ought to be aware, for example, that financial markets have been relatively friendly to investors, and that most things that you could have bought then – stocks, government bonds, corporate bonds, etc. – have gone up in value.
To answer, you could explore a somewhat different formulation of the question. For example, What is the least liked investment alternative today, and why? This reformulation is useful for the simple reason that, historically, it has been far easier to make money by buying something when it’s cheap, and this often implies buying something few people want. A contrary approach, if you prefer, to the purchase of only “limited edition” watches, or to dining in only the hottest restaurants in town.
Today no one wants to be caught dead with cash, pure and simple. Cash, or its close brethren short-term government bonds, have been rendered “worthless” by central banks all over the world by lowering official interest rates to 0. And this in order for people to be enticed to pursue far greater risks in their portfolios than they either should or would otherwise have done in less forcible circumstances.
As mentioned above, this game has worked out well for the last five and a half years, but now it’s time to think about the next five years, and decide if the strategy of avoiding low-risk investments will still work. No one knows with precision the right answer, but given current valuations and the overwhelmingly positive opinion of most commentators in regards to anything-but-cash I would argue that the probabilities are not stacked in favor of other investment alternatives.
Investing is like a marathon, not a 100-meter sprint. The latter is speculation. When no one wants something, it’s worth at least to take a look at it and ponder why.
Photo Source: A friend’s photo