Financial repression; this term has to the defining factor of the last few years in the world of investments. Central banks promoted consumption with all the tools that they have while forcing savers into riskier and riskier assets in search of the non-existent yields. The fight against deflation and a global credit event changed the playing field in financial markets.
Stock markets roared to new all-time highs, while government and corporate yields collapsed to historic lows. But for now, both of those asset classes have been squeezed dry of prospective returns by investors, actually, stocks already had a two year period with no meaningful returns before the Trump-rally started last November.
Today, in the developed world, there is a huge vacuum of reachable yield, and as I concluded in my article on central banks, I think that this creates a dangerous environment for passive investment strategies, and you should be aware of the risks of relying on pension plans and government transfers due to the sorry state of the global financial system.
What is the Answer?
Now you might ask what do I do in this situation. Well, the recipe is one that probably won’t be too popular with most of the people out there: Save more, do your homework, and invest selectively. I believe that passive stock and bond investments, especially in the US and Europe, simply won’t make it if you are counting on double digit annual returns for the next 10-15 years—not even mid-high single digits for that matter.
So what are the alternatives? Real estate, individual stock and bond picks, “exotic” stocks, farmland, commodities, cryptocurrencies, arts, vintage cars… there are a lot of fields of investing that you can venture into, besides running your own business of course. From the above list, I have an interest in almost every segment, with an unwantedly big part in real estate, due to a family bankruptcy event that required my help, and used up virtually all my liquid investments a couple of years ago. Since then, I try to focus on hard and/or naturally yielding assets, while trying to stay independent from the long-term debasement of fiat currencies.
My Savings Rate
I am falling shy of the target of the 33% club when it comes to savings, although it has to be said that my income (part from trading stocks, cryptos, and forex; and part from journalism) is volatile, so sometimes I am even able to save around 40%, but in practice the average for the past two years around 20%. Granted, I spend a lot on traveling and getting to know the world, but I believe that that’s a good way of “wasting” money.
I, together with my partner, have a real estate investment (Airbnb) in downtown Budapest, yielding a nice 7% after tax and amortization, with some potential for capital appreciation (50% of my savings). I have an interest in a hazelnut-plantation that will hopefully yield 8-10% annually starting in 2018 (10%). I hold a portfolio of government (US, Hungarian, Russian, Mexican) and corporate bonds (10%), with an average duration of 4 years and an intention to hold them until maturity.
I have around 10% each in gold and cryptocurrencies, and I am putting a monthly fix amount into an emerging market fund focused on South-East Asia and Africa where I see the bulk of the growth in the coming decades (5%). I also try to have around 5% in fiat (US Dollars and Euros) for every day and emergency expenses.
The Problems with my Portfolio
I believe that although it’s a relatively balanced portfolio, and it is more or less in line with my view of the world, liquidity is an issue. Right now, I’m trying to put more and more of my active and passive income into liquid, short-dated bonds and cash, to have enough dry gunpowder for a possible major pull-back in stocks that would provide better valuations, and a good environment for stock picking.
Some of you would say that the 10% in cryptos is a small amount, and sure enough I am letting that increase naturally, as my core positions outgrow the rest of my portfolio; but some of my other holdings have great tax-benefits accompanied by very low volatility which make them great choices for the long run.
My stock exposure is laughably low, and I might be proven wrong by another few years of bull-market action, but for now I feel comfortable with this ratio. Also my gold holdings are all paper, and I am only in a planning phase of going physical, but I hope I won’t regret that decision.
What’s your take?
So there it is, you are free to criticize my investments, but don’t get me wrong, I know it’s not optimal as of now. As I started rebuilding my savings in 2015, the composition is what you could call “eclectic”. I will update you as my view of the world changes, and I will share my investment ideas in real-time. Use them at your own risk :).
So, what do you think about my positions? Do you see risks that I don’t? Let me know in the comments below, and of course, I would be happy to discuss Your portfolio as well.