Understanding Classes of Assets
For anyone attempting to understand the conflicting finance news or looking for good investing tips, these are confusing times. With the stock market hitting new highs, each class of investment vehicle, from real estate to commodities to Treasuries, seems to be giving different signals.
The basic principle underlying all investment is the concept of getting a return on investment as well as a return of investment. With the corollary that higher risk means the right to demand higher returns, the basics are straightforward. These basics violated many investors’ sense of security, however, in recent times.
Since the market meltdown of 2008, when many people lost over 50% of the value of their retirement accounts, investors have been on a huge seesaw when it comes to their portfolios. The heavy losses in equities caused many to flee the markets. Now, they see that if they had just waited, all the losses would be recouped, and then some. In the interim, they have observed very significant rises in the commodities market, and especially in precious metals.
The Importance of Diversification
Not too many years ago, the process of investing found very few people considering different investment classes. For over a century, the stock exchanges, or equities markets, have outperformed all classes of investment. That track record led people to buy stock and forget everything else other than some bonds. Things have changed. The past decade is the first time the precious metals markets broke this historical precedent. With the meltdown, the concept of diversification is a leading investing tip.
In 1990, the concept of diversification of portfolios won the Nobel Prize for Harry Markowitz. Since then, financial and estate planners approach long-term investing from a new perspective. To understand the contrast, it is important to understand the basic differences between equities and commodities, particularly the precious metal commodities.
Securities and the Stock Market
Most people understand that the stock market, and specifically the Dow Jones Industrial Average, the “Dow”, is based on the trading of stocks and securities of the larger publicly companies. Shares of individual companies rise and fall based on their performance in sales and profits. There is a larger, communal effect on the market based on overall economic times and personal finance news.
Over the years, many people took great comfort in the fact that, in spite of ups and downs, the overall DJIA continued to rise at an overall average of 4.8% annually. From January 2000 to February 2012, however, the total return for the entire period was only 10%. True, those numbers must also eventually be put into the 20 and 30 year trends. The fact is, however, that this trend changes traditional wisdom about the equities market. For all the risk it represents, as shown in 2008, an investment of $10,000 in January of 2000 would have gained only $1,000 in value, or to $11,000.
The Gold and Silver Decade
The story on precious metal investments provides quite a different story. Anyone buying an ounce of gold in January of 2000 at $282 an ounce could sell that ounce on Valentine’s Day 2012 for roughly $1,700. That means the same $10,000 investment would have appreciated to a value in excess of $51,000.
Silver tells an equally dramatic story of significant returns. Again, using a January 2000 spot price of approximately $5.00, in 2012, silver valued at $33.60. Here, that $10,000 investment yielded an increase to over $53,000 in value. No other asset classes available to the investing public performed to these levels over the past decade.
These numbers are impressive and generate a number of questions. Foremost among the questions are two. First, why did this historical occurrence come about? Secondly, what does it mean for the next decade of investing?
The Looming Tsunami
Behind the currently booming market, many economists feel they have already felt the earthquake that will mean the end of that upturn. The ongoing spending by governments around the world, including the U.S., makes most economists and financial experts believe that a veritable tsunami of inflation is headed to our shores. In such situations, commodities are seen as essential asset classes of a diversified portfolio.
As to the future of these trends, the answer to the second question only compounds the concerns. As governments continue to spend, their debt levels and debt service continues to explode. Many countries, such as Greece, are at the tipping point relative to debt becoming unmanageable. When this happens, there will be even more upward pressure on the prices of gold and silver. When, not if, that happens, according to many, the next decade will, in fact, be the decade of precious metals.