As you know from reading Money Morning, we’ve made it clear that you can’t afford to be out of the stock market.
One reason is that for most Aussie investors there just isn’t a wide enough range of alternative investments.
You can own cash, stocks or property. That’s pretty much it in terms of main investments. Yes, you can also invest in gold, but we don’t see gold as a wealth builder; we see it as a wealth protector.
And since property investing is so expensive (it costs thousands in transaction and financing costs) most investors only have two choices: cash or stocks.
That puts you in a bind. Wherever you choose to invest, you’ve got to face a big risk – the risk of being in stocks versus the risk of not being in stocks. But one financial planning veteran says the choice is a no-brainer.
This veteran says investors should only own one asset. And unlike most financial planners he won’t make a penny in commissions if you follow his advice…
In fact, we can tell you right now what asset he recommends putting 100% of your money into.
He won’t mind, because he openly tells anyone who’ll listen. The asset? Cash.
It’s plain and simple advice. But why does this financial planning veteran tell investors to only hold cash? And how does that sit with your editor, who says investors should have up to 50% of their investable assets in stocks?
It’s an interesting (some would say confusing) conflict of opinion. The thing is, while we may have different views on asset allocation, our view on the overall state of the world economy is broadly the same. We’ll explain more on that in a moment.
It really comes down to the timing, your attitude to risk, and the risks you’re prepared to take (or not take) in order to achieve your investment goals.
Cash Tsunami to Strike Markets
Our position is clear. We say that central banks and governments will do all they can to unleash continued torrents of cash into financial markets.
In fact, these torrents will become so large that the only way to describe them will be to call them a financial tsunami. This huge inflow of freshly printed cash into the markets will help central banks and governments to achieve their goal – more inflation.
And what will that mean? From a non-investment standpoint it means a higher cost of living. Put another way, things will become more expensive.
The most dangerous aspect of this is that gradual and persistent inflation is a ‘silent killer’. It’s hard to spot as it’s happening. For the most part you only notice it years down the line, when you suddenly notice that things are more expensive than they used to be.
So how can you combat this? Well, there isn’t a guaranteed solution. Many people think that gold is the best way to hedge against inflation. That’s not necessarily true. The best way we know of to beat inflation is the stock market.
That’s why we suggest investors have up to 30% of their investable assets in dividend paying stocks. We also suggest investors have another 20% of their investable assets in speculative small-cap and blue-chip growth stocks.
We know there’s a risk that stocks could fall if the world economy goes through a repeat of 2008. But our bet is that’s not on the agenda…yet. To tell the truth, our bet is the central banks could keep the tsunami of new cash flowing into the market for another 10 or 20 years…perhaps even longer!
That’s where we differ with Vern Gowdie – the veteran financial planner we mentioned at the top of this letter.
Stocks or Cash?
At first glance it seems impossible to reconcile the idea that two people who offer completely opposite investment advice could agree on the outlook for the economy and markets.
But we do. We both see big trouble ahead if central banks and governments keep meddling in the economy.
Our big point of difference is when the day of reckoning will occur. As we mentioned above, right now we say the current situation could last for 20 years. That’s why we’re in no hurry to ditch stocks.
We’re so bullish that we’ve gone on record to say the Australian market will hit 7,000 points in 2015. And we’ll go on record now to say that if it takes out that high, the next target for the index would be 10,000 points and even 15,000 points.
That may seem unlikely today, but that’s the thing with inflation-induced stock rallies, they tend to soar to previously unthinkable highs.
But what about Vern’s view and his 100% cash allocation? Unlike your editor, Vern doesn’t see the current situation lasting another couple of years, let alone 20 years. That’s why he says it’s just not worth the risk to own anything other than cash.
Many may see this as an extreme view. Others will see it as a prudent way to allocate, manage and preserve their wealth.
Whatever happens, you can’t afford to sit on your hands and not think about it. Be in no doubt that the meddling will lead to an unpleasant outcome. But whether that happens within the next two years or in 20 years is impossible to say today.
All we can say is, for months you’ve heard our view on the subject. If you’re still undecided on what you should do, you would be doing yourself a disservice if you didn’t at least look at Vern’s point of view as well. 100% cash? It may sound crazy, but for you it could be the best advice you’ll get all year. You can find out more on the subject here.
Cheers,
Kris
PS: Vern’s special report outlines five Aussie stocks he says are overvalued following their rally from the 2009 low. If you own any of these five stocks it may be time to cash in your chips and look for better value elsewhere. Go here for more.
Special Report: The Recession Strategy
