This is a time to be cautious of being cautious


There is a lot of worry and fright circulating as news and information about investment markets right now.

I don’t want to downplay the potential for dire outcomes from the GFC and various government attempts to reduce its impact on their economies. However, there does need to be a little more informed comment on just how current conditions reflect historical norms and areas that the uninformed need to be careful of.

Time is precious right now but here are my suggestions of areas where caution should be exercised –  in large, creamy dollops:

  • Bond Funds – one of the least understood areas of investment. These funds work in reverse to long term interest rates. In other words, when rates are low then they will show their best returns. If you invest when rates are low then you are betting that rates will stay low long enough for your low income return to be ok or that those rates will go lower. With interest rates around the world at historically very low levels, either of these approaches is the equivalent of investing when the sharemarket has just shown many years or above-average returns.
  • Gold – gold is benefitting from massive speculatory inflows. In other words, we are not witnessing a demand/consumption price change but a speculative investment play. It may be correctly based on the potential for excessive government debt to play out as hyperinflation and currency debasement BUT regardless of that, it is predominantly speculative in nature. Many commentators are suggesting that the price of gold will go to $2,000 or even $5,000 an ounce. It may or it may not but we must not lose track of the fact that any movement above historical trends is the starting point for a bubble, and gold is definitely on that track.
  • Residential property in Australia – is tracking so far above global property values that any suggestion that it is not a bubble is looking rather silly.
  • Currency markets – The inbalance between the US and China is growing with every month of surplus China records. Ploughing that money back into US Treasuries and income notes simply delays the inevitable rebalance that has to occur.

This is not an investment recommendation. Each individual must look to their overall portfolio in the context of their existing debt, income and objective position. The point is more to suggest that in times such as these (which are reasonably reflective of the 1988, 1994 and 2001 scenarios), investors start casting their eyes around for ‘better’ returns, and often these are being displayed by areas that are themselves beginning to resemble a bubble.

All of these issues are reflective of uncertainty, and the perception it creates. They should be dealt with in a broad portfolio but for the genuine long term investor, caution should be exercised before acting with too much caution.

Feel free to comment or criticise.


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