SMSF Investment StrategiesSharing Simple Strategies for Self Managed Super Funds
Our Investment Strategy for 2012
We commenced the review of our investment strategy with an assessment of market conditions and concluded that on a “big picture” level, the debt crisis was playing out as we expected but at a much slower pace. There seems to be a lack of political will to implement the tough measures needed to solve the problems permanently. After 2 years of denial, Greece has finally admitted that there is no way they can ever afford to pay back what they owe. The only question that remains now is who should take the losses and again the governments are using their powers to force private investors to accept “voluntary” 50-70% write downs while the public investors like the European Central Bank (ECB) do not have to suffer any write downs at all. Making the write downs voluntary also means big banks who sold credit default swaps will not have to reimburse the investors who bought this default insurance because it will not be considered a credit default event. Even as the Endgame is rapidly approaching for Greece, more delay tactics are being employed to tackle the debt in other highly indebted countries. The problem of “too much debt” is still being addressed by adding more debt. In December 2011, the ECB just gave insolvent European banks billions of euros of low interest loans to avert another Lehman Brothers style credit disaster and stock markets surged and bond yields fell right after this Long-Term Refinancing Operation (LTRO) was announced by ECB’s new President Mario Draghi. The US public debt in Jan 2012 is now over 15 trillion dollars, which is a 50% increase from what it was in 2008. Watching these developments would put anyone off investing in government bonds. Dr Oliver Hartwich has called the LTRO “A Ponzi by any other name“. I can understand why so many investors are flocking to buy gold because they have lost faith in paper currencies and we too are planning to increase our allocation to gold in 2012. Even Bill Gross of PIMCO who runs world’s the biggest bond fund is talking about investing in gold. As the price of gold is already in bubble territory, we prefer to get our exposure to gold via gold stocks.
Once again the global market indices in 2011 have shown that a strong economy does not automatically mean a strong stock market performance. As you can see from the chart below, the stock markets in strong economies like China and Australia underperformed when compared to the US and even Europe despite the widely acknowledged economic problems there.
It looks like the availability of liquidity has a much bigger impact on stock performance than company earnings. 2012 is an election year in the US and we are pretty sure that the politicians will do whatever it takes to look good before the elections in November 2012. We will increase our long positions in quality undervalued US stocks in 2012.
Although we are a little more bullish on “risk assets” in 2012, we are aware that the long term “big picture” is still the same. The debt problems in the US, Japan and other European countries are still growing and will have to be addressed eventually and hence the risk of a big credit event remains. The ongoing debt crisis reminds me of a video I watched on the Buffalo Creek disaster. For years a mining company built dams to contain their toxic mining waste above the Buffalo Creek valley. When one dam filled up, they just built another one. Life in Buffalo Creek was just fine until one day a crack in Dam #3 caused the waste to overflow and overwhelm Dam #2 and Dam #1 as well. Seventeen towns in the Buffalo Creek valley were completed destroyed within hours. Right up to the end, the mining company assured the people of Buffalo Creek that the dams were fine and there was no danger to them. As a small retail private investor, I feel like a resident in one of the small towns in Buffalo Creek living under dams that contain the massive amounts of toxic debt. We have no control over government policy responses to the debt problems, but after 2008, we cannot say we are unaware of how fragile our global financial system is. We really cannot predict if we will have inflation or deflation in the years ahead so the best we can do is to maintain a 50-50 allocation to risk and defensive assets. While our SMSF may increase our investments in risk assets, we will still maintain our hedges and all new contributions will go into fixed income investments which we are doing through a corporate super fund rather than through our SMSF.
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