Gwyneth Paltrow's weekly newsletter GOOP landed in inboxes around the world Thursday morning, and this time she's looking out for subscribers' wallets.
Here, a collection of thoughts on the topic of investing from two bankers, a money coach and an accountant. Some illuminating concepts, histories and practical advice for the layman in these uncertain times.
--- Gwyneth Paltrow
In the past she has dished out recipes, travel recommendations, exercise tips, book picks, and spiritual guidance, but this is first foray into the market.
Rather than proclaim any expertise herself, she enlists four others. She includes a lesson in market basics from a Hong Kong-based fund manager named Rod Rehnborg, tips from a self-billed 'Money Coach' named Lynnette Khalfani-Cox, college saving advice from CPA Stuart Gelwarg and lastly, a 'market commentary' from a Wealth Manager name Michael Tiedemann.
Sign up for the newsletter here if you dare, and read this week's below and then respond.
Basics of Investing
By Rod Rehnborg
Given stories of gigantic "ponzi schemes," bank failures, and obscene Wall St. bonuses, the thought of handing over your hard-earned money to the financial industry is not very appealing. And, as a result, most people I meet wonder what to do with their shriveled, shrinking, nest egg.
Of course, the answers to that all-important question are as numerous as there are nest eggs out there. Nevertheless, it may make sense to "hit the reset button," and reflect on the very basics of investing.
1. Why do we save?
A generation ago, people use to save towards the purchase of a good (TV, car, washing machine, home...) but this changed with the advent of the credit card, the auto loan and second mortgages. Instant gratification was invented and we could pay for the goods AS we enjoyed them, not BEFORE. The birth of consumer loans also meant that there were now only two reasons to save: 1) for a rainy day and 2) for when we grow old and can no longer work but still need to consume.
In other words, the most common reason we save today is to pay for something much later (i.e.: retirement). Thus, the important thing is to have the money we save now grow in such a way that it will match up with the cost of those things we will want to pay for later. There are two things to consider: 1) how much our investment is going to grow and 2) how much the price of the things we will want to pay for in the future will be.
The price something will be in the future depends largely on how much inflation there will be. If our savings do not earn the same percent return as the inflation rate, then we are actually growing poorer even as we save. So the first question we, as savers, should ask ourselves is what the likely future inflation rate will be.
2. Inflation -- what causes it?
Basically inflation is determined by how much money is available in the economy. And this amount of money is largely determined by how much people get paid for work and how easy it is to borrow money. Since wages have not gone up much in recent years, and the current job market is terrible, and given how hard it is to borrow money because of the financial crisis, there is not much chance that inflation will increase in the next year or two at least. In fact, the bigger worry right now is DEFLATION.
What's the problem with deflation? The big problem with deflation can be easily understood by looking at a home financed with a mortgage. If you borrowed money for a house and the house drops in value because the cost of everything is dropping, you still owe the same amount of money but the house is worth less. When we enter into deflation, all people want to do is save money to repay debt. Economists call this the "paradox of thrift" in that savings is a "good thing," but if everyone saves at the same time, then it can have negative effects for the overall economy.
So, what is the best way to save for the future in a deflationary environment? That's pretty easy: just leave your money in the bank and watch its purchasing power grow as the prices of everything else fall. A very forward thinking Japanese person in 1990 who was planning to purchase a house in 2009, only needed to leave his or her money in the bank as house prices just hit a twenty-four year low in Japan!
In order to fight off deflation, the US government is scrambling to bail out financial companies in the hope that they will lend more, and is also coming out with "stimulus packages" of government spending to pump into the economy so that more people get wages. In turn, all this government activism is raising the fear that inflation could rise dramatically in the future. Why? Because governments around the world are promising to pay for lots of things; and the way governments pay for things is either by borrowing the money by selling bonds or, if not enough people want to buy this government debt, by printing actual money to buy their own debt. But for the moment at least governments are losing the battle against deflation as people are paying down their debt faster than the government can print money and inject it into the economy.
Let us now look at some main types of investments to see how they fit into the inflation/deflation picture.
Stocks Stocks are simply a way to own a piece of a business that will be earning profits that should on average grow at or above the rate of inflation. When you buy a stock you are essentially passing your extra money forward to someone else who needs it and who will hopefully be good stewards of it by using it to invest in the equipment and people and other assets required to grow their business.
Bonds A bond is just a loan to either a government or company. The main concern with bonds is whether the borrower will be able to pay you back and what interest rate will you receive. Now, there is a big debate about US Federal government bonds (a.k.a."treasuries"). These bonds have no risk of you not getting your money back since the government can always raise taxes or even just print money to pay you back. However, it is by no means certain whether government bonds will be a safe investment or a horrible one - it all depends on whether there is inflation or deflation. The current interest rate you receive on bonds is very low, but you will be happy with even a small return on your money if there is deflation and the cost of living drops. It seems that buying government bonds now is really a game of chicken, and best left to professional speculators, which is ironic since government bonds are supposed to be among the safest of investments.
Commodities Commodities are goods that we, as a society use in our daily lives (like oil, gold, food, etc.) a.k.a. "stuff." The idea is that the prices of this "stuff" will rise in line with inflation and if you think the world might be running out of "stuff," then maybe the prices will rise even faster than inflation. When talking about commodities, it's important to keep in mind that demand for most of them will fluctuate in line with the economy. So when the economy is strong, there is generally more demand for "stuff" like oil and copper. The one commodity that is different from the others is gold. Gold has for ages been used as the ultimate store of value, since aside from its good looks it is extremely hard to dig out of the ground and thus there is never going to be any meaningful increase in supply of it. There is also not much practical use for it either so its predominant purpose is as a money substitute. While in theory gold should hold its value against inflation, the reality is that historically gold has just barely kept up with inflation and has performed much worse than stocks and bonds over the long term. If you are determined to invest in something that will hold up amidst inflation, consider a vegetable garden or solar panels. The money spent on creating a source of food and electricity for yourself will pay off handsomely if inflation drives food and energy prices higher.
Hedge funds Recently, it seems like hedge funds are vying with terrorists for public scorn, but let's have a quick look at what they actually do. Most hedge funds use those basic assets discussed above, but do things with them so that the return is different than the assets themselves. The result is that the returns that hedge funds deliver will be different than what you would receive if you owned the stocks, bonds, or commodities themselves. Investors give hedge funds lots of money to manage because investors value the diversification provided by hedge funds. There is actually a useful social purpose for hedge funds in that they help keep money flowing around the financial markets so that companies with good ideas can raise money to expand their businesses even when financial markets are weak.
So that's a brief and totally non-comprehensive overview of some of the issues worth considering amidst all the chaos and emotion of investing these days. There are no easy answers, although a mix of stocks, hedge funds, and vegetable gardens seems sensible to me.
Rod Rehnborg manages an investment fund for institutional clients at Marshall Wace GaveKal. His specialty is "market neutral" investment strategies in Japanese stocks that deliver returns with low correlation to the stock market. He is based in Hong Kong.
Top 10 Tips for Saving Money and Investing Wisely
By Lynnette Khalfani-Cox, The Money Coach
In these tough economic times, we all need to think about how to save more, or earn more from our hard-earned dollars.
Granted, it's not always easy to save -- especially if you've never been taught how to do so. It can also be difficult to sock away money for the future when you're concerned with paying this month's bills. Still, everyone can benefit from stashing away a little extra cash. Here are 10 tips on how to do just that -- painlessly and without needing to have an MBA in finance.
Tip#1: Just Ask
I'm always amazed at how readily people automatically whip out their wallets - or their credit cards - to get a product or service they want, without thinking at all about whether they can get want they want cheaper, or maybe even free. To make saving money a way of life, remember the phrase: "Just Ask!" For starters, ask yourself three questions:
* Can I get it free?
* Can I get it for less?
* Can I get it in exchange for something else?
Believe it or not, we're quickly moving toward a free nation: free music downloads, free news and information, free offers for everything from cosmetics and luxury goods to legal aid and complimentary meals.
If something you want isn't available free, that doesn't mean you can't get it for less than the full asking price. Just be prepared to negotiate - in a nice way, of course. Most people think the price tag they see advertised is "written in stone." The truth is that you can negotiate nearly everything - from clothes in a department store to medical bills. Ask for a discount if you pay cash. Always ask "is that the best price you can offer?" And don't be afraid to let retailers know that you're looking for a deal. There's no shame in asking: "Will this item be going on sale soon?" If the answer is "Yes," wait to buy it until the sale occurs.
Can't find a freebie or a discount? Then it might be time to barter. Instead of paying for goods and services, offer to exchange your talent (maybe it's cooking, dentistry, braiding hair, teaching piano or whatever) to others. Even if you can't offer a service, you may have something of value to barter. That's the whole idea behind the increasingly popular home exchange services, for instance, where you get to swap homes with someone in a far-flung country (free of charge), in exchange for letting them temporarily reside at your place.
Tip #2: Embrace (Don't Hate!) Being a Budget
Thanks to the recession, more Americans are finally getting back to the financial basics - including doing something that most individuals dread: budgeting. If you don't yet have a budget, or if your current budget is constantly out of whack, take heart in knowing that you're not alone. In fact, 70% of all Americans don't have a working budget. Perhaps that's not so surprising considering most of us didn't learn how to budget at home or in school. Be honest: When you think about being "on a budget" do you inwardly loathe the idea, wishing instead you had so much money that you could spend on anything you want? Or do you automatically assume that having a budget means drastically changing your lifestyle, because there will be a lot of things you can't buy, do, or have? If so, you must banish those negative thoughts and misconceptions. First of all, even millionaires have budgets.
Realize also that creating a budget - and living with it - doesn't have to be so restrictive. Nor does it mean a complete end to all spending or having fun. In fact, a well-prepared budget will have certain "treats" built into it. And it's precisely these "treats" - certain rewards that you give yourself every month - that will help you stick to your budget. Think about a budget as your own personal "Spending Plan". With a "Spending Plan," you establish priorities about what to do with your money - and what not to do with it. In other words, with a "Spending Plan" you'll no longer be making an endless series of impulse purchases (both large and small). Instead, you'll finally control your money, instead of letting your money control you.
Besides giving you power and control over your finances, and helping you save money, a skillfully crafted budget:
* Keeps you from living paycheck to paycheck
* Allows you to save for future goals and dreams
* Helps you avoid going into debt
* Reduces the stress and worry about paying for bills
When you look at these benefits of having a budget, or a "Spending Plan," it's clear that you should embrace the concept, not fret over it.
Tip #3: Boost Your Credit - and Earn $1 Million
In one of my books, The Money Coach's Guide to Your First Million, I explained how having great credit can help you save or earn over $1 million in your lifetime. How so? People with perfect credit get the best interest rates and terms on everything from business loans and student loans to credit cards and mortgages. They also land better-paying jobs and more frequent promotions. Moreover, they save money on a host of financial products that are tied to your credit score - such as life insurance and auto insurance.
Anyone living in today's society knows that it can be a drag to be turned down for credit - or even denied a job just because you have bad credit. So what should you do? Learn how to boost your credit standing by knowing the ins and outs of how your score is determined by Fair Isaac Corp., the company that calculates your FICO credit score.
(Get your FICO score at www.myfico.com). FICO credit scores range from 300 to 850 points; the higher your score the better. You've got "Perfect Credit" if your score is is 760 or higher. Under Fair Isaac's credit scoring model, your FICO credit score is based on five primary factors:
* 35% of your score is based on your payment history
* 30% of your score is based on the amount of credit you have used
* 15% of your score is based on the length of your credit history
* 10% of your score is based on your mix of credit; and
* 10% of your score is based on inquiries and the new credit you've taken on
Knowing these facts, here are some guidelines to help you maximize your credit score.
* Pay Your Bills on Time
Even if you can only make minimum payments, that's better than being late with a bill because late payments of 30 days or more can drop your FICO score by 50 points or more.
* Don't Max Out Your Credit Cards
In general, try to keep your balances to no more than 30% of your available credit limit. For instance, if you have a card with a $10,000 credit line, make sure you don't carry a balance of more than $3,000 on that card. If you can pay off your credit cards each month, that's even better. But if you can't, it's better to spread out debt over a few cards, to maintain lower balances, rather than max out any one card.
* Keep Older, Established Accounts Open
It feels good to pay off a credit card and finally get that statement showing a zero balance. However, if you pay off a creditor, don't make the mistake of closing that account because 15% of your FICO score is based on the length of your credit history. The longer a credit history you have, the better it is for your score.
* Avoid "Bad" Forms of Credit
I'm sure you've walked into a department store and been offered 10% off - or some other discount - just for opening up a credit card with that retailer, right? Did you take the bait? If so, realize that you might have hurt your credit score. Here's why. The FICO scoring model rates some forms of credit more favorably than others. For instance, the presence of a mortgage on your credit report will help your score, but too many consumer finance cards (i.e., the cards issued by department stores and retailers) can hurt it. For this reason, do yourself a favor and say "No" to those credit card offers from stores you patronize. Just use a major credit card - like a Visa, MasterCard, American Express, or Discover Card - if you need to use credit to make your purchases.
* Only Apply for Credit When You Truly Need It
Just because you get a pre-approved offer in the mail, or some telemarketer calls you to solicit for a credit card, doesn't mean you should accept it. You should only seek out credit when you absolutely need it because taking on too much new credit - or even just applying for it - will lower your credit score. Each time you apply for a loan - whether a credit card, an auto loan, a mortgage, or a student loan - the lender pulls your credit report and generates an "inquiry" on your credit file. That inquiry remains there for two years.
And a single inquiry can lower your FICO score by up as much as 35 points.
Tip #4: Go Ahead and Shop - Just Don't Forget To Take These Three Things
People who are watching their wallets should always go shopping with three things: a budget, a buddy, and a stopwatch. The budget is your pre-determined amount of how much you can afford to spend in cash. If you do use credit, set a maximum that you can pay off in two or three month's time maximum. Your buddy's job is to keep you accountable. She's the girlfriend who's going to go with you - to that boutique you love, to the mall, or wherever - and remind you not to overspend and go into debt. It's also her role to get you out of the stores once you've hit your limit. And here's where the last "must take" shopping item comes into play.
You can do a lot of damage to your wallet and to your credit cards by spending hours upon hours in the mall or shopping all day long. Instead, trying setting a time limit on your shopping excursions. A good way to do it is to use a ticking stop watch - or any kind of device with a bell, timer, beeper, or ring tone - that you can set for a fixed, brief period of time. A good time limit is 1 hour; 2 hours maximum. You can set your stop watch so that it "rings" in one hour, and then you have a verbal/auditory reminder that it's time to put and end to the shopping for the day.
Tip #5: Turbo-Charge Your Savings
You've probably heard of employers that offer a matching contribution when you put money into a 401(l) retirement savings plan at work. Well, a 401(k) isn't the only way to turbo-charge your savings. You can also get a matching contribution for your savings by opening an Individual Development Account, or IDA.
People who are low to moderate income earners are eligible to sock away money in an IDA, which is a savings account designed to help people develop fiscal discipline and reach goals, like saving for college, buying a home, starting a business, or paying for retirement. (And don't be fooled by that term "low income." Millions of individuals and families - even white collar workers -- will be considered "low income" because they recently lost a job, took a pay cut or have had their work hours reduced).
These IDAs also turbo-charge your savings, because with an IDA, for every dollar you save, you get a $2 or $3 matching contribution. That's like getting a 200% or 300% return on your money - risk free! What's the catch? With most IDAs you have to agree to save for a set period of time, at least 1-year. Some require 5 years of savings or more. But let's say you can afford to sock away $200 a month. At the end of the year, that's $2,400. With an IDA that has a $2 to $1 match, you'll get an additional $4,800 put into your account. The money comes - no strings attached - from corporations, government agencies, and non-profits. You can locate an IDA in your area by visiting: www.idanetwork.org.
Tip #6: Don't Invest In the Stock Market Prematurely
At my financial workshops, or via email, I sometimes get people questions from people wanting to know where they should invest $5,000 or some other chunk of money they have burning a hole in their pocket. All too often, these people haven't even taken care of the financial basics: like paying off credit card debt, establishing at least a 3-month cash cushion, purchasing life insurance and disability protection, and drawing up a will. Until you've handled these five financial basics, you're not yet ready to risk money on Wall Street. Let's say your buy $1,000 worth of stock and then three months later your have a financial emergency of some sort. With no "rainy day" fund, you'll be forced to sell your stocks to raise cash. Under this scenario, you'll be paying higher taxes, since you owned the stock for less than one year, and depending on the stock's performance, you might also have to sell at a loss.
Tip #7: Focus on the Process of Investing - not Products
If you've ever read a financial magazine, you've undoubtedly seen headlines like "The Best Mutual Funds You Can Buy" or "The 10 Stocks You Must Own Now!" These kinds of stories cause many to focus on the wrong thing when it comes to investing. To become a successful investor, don't obsess over products - i.e. which is the so-called best stock, bond or mutual fund. Instead focus on the process of investing. You'll reap your riches in due time if you can master the five-phase process of investing:
* Strategizing to meet your own personal goals and needs
* Buying the right investments for the right reason at the right price
* Holding and monitoring the investments in your portfolio
* Selling investments at the right time, for the right reason, in a tax-efficient way; and
* Picking proper financial advisors for help
Tip #8: Avoid Get Rich Quick Schemes and Fads
When you are ready to invest, do yourself a favor and stick to tried and true investments, like stocks, bonds or mutual funds. Save money by not wasting it on get-rich quick schemes and fads. Even steer clear of constantly playing the lottery as so many people do - with dreams of getting a big payout.
Consider the story of Jack Whittaker, a West Virginia businessman who became famous when, on Christmas Day 2002, he won $315 million in the multi-state Powerball lottery. At the time, it was the largest jackpot ever won by a single winning ticket in U.S. history. Sadly, Whittaker's life has taken a major downturn since his big "win." He has had numerous legal problems and family tragedies, and much of his fortune is gone. Among his family woes: his only granddaughter, Brandi, was found dead of a drug overdose at age 17. She had reportedly been receiving $2,100 a week allowance from her grandfather. Also, in May 2005, Whittaker's wife, Jewel, filed for divorce after more than 40 years of marriage. She said winning the lottery was "the worst thing that ever happened" to the couple. The lesson: don't rely on the lottery or other such schemes as your pathway to wealth.
Tip #9: Don't Bet the Farm
Overconfidence can be the death knell to your investment strategy. No matter whether you're investing in the stock market, or in a new business venture, it's always a bad idea to put all your eggs in one basket and to risk everything. Smart entrepreneurs and smart investors don't "roll the dice" and risk everything. They take risks - but they're calculated risks. Don't gamble it all: 100% of your savings, your credit, putting your home up, etc. in the hopes that you'll create a successful business or that one investment will pay off in spades. Instead, be willing to invest in your business, or in a company that you've researched, but don't do so foolishly, at the expense of everything else.
Tip #10: Select a Good Financial Team
Unfortunately, the recent rash of financial scams reminds us all that you can do practically everything right - including working hard, saving and investing your whole life - and still wind up penniless if you don't have trustworthy financial advisors in your corner. Consider what happened to the victims of Bernard Madoff - who created the largest Ponzi scheme in U.S. history and was recently sentenced to 150 years in prison for his misdeeds. As an investor, you've got to do your homework to stay away from the "ins" and the "uns"
* the inexperienced
* the incompetent
* the unprofessional
* the unskilled
* the unscrupulous
To find a reputable investment advisor, start by using the BrokerCheck service of FINRA, the consumer protection agency also known as the Financial Industry Regulatory Authority. Reach FINRA at www.finra.org or by calling 800-289-9999. They'll give you background information on any broker or brokerage firm you're thinking about doing business with. FINRA can even tell you if a broker or investment advisor has ever been sanctioned or fined by securities regulators. These are obvious red flags. Also get references and check them, and insist on getting Parts 1 and 2 of your advisor's ADV form. An ADV form will disclose whether an investment advisor went to school, how much professional experience they have, and whether they've had an negative disciplinary history from state or federal regulators. In addition to a broker or investment advisor, having a qualified accountant and a good certified financial planner, can help you reach your financial goals.
Lynnette Khalfani-Cox, The Money Coach®, is a personal finance expert, television and radio personality, and the author of numerous books, including the New York Times bestseller "Zero Debt: The Ultimate Guide to Financial Freedom". She has appeared on such national TV programs as "The Oprah Winfrey Show", "Dr. Phil", "The Tyra Banks Show" and "Good Morning America". She has been featured in the "Washington Post", "USA Today", and the "New York Times", and can frequently be seen as a guest commentator on CNN and FOX Business Network.
For more information about Lynnette, or to sign up for her free personal finance newsletter, visit her website and blog at: www.TheMoneyCoach.net. Lynnette is also on numerous social networking sites, including Twitter, Facebook, and LinkedIn.
By Stuart Gelwarg
Many Americans graduate from college and start their first jobs inundated with paperwork about their company's retirement plans. These plans provide great tax benefits and are a great way to save for the future. If they don't sign up for the company retirement plan, American taxpayers are typically reminded at tax filing time about starting an IRA. But nowhere along the line is there that human resources department, or tax return instruction booklet screaming out to you about saving for college.
Sending children to college is likely the biggest expenditure one has in the raising of children in the U.S. and the Internal Revenue Code has an underutilized provision in it to help families cover the cost. Section 529 of the Internal Revenue Code provides for College Savings Plans, commonly known as 529 plans that yield great tax benefits. Contributions to the plan grow annually without being taxed. When funds are withdrawn, if the funds from the account are used for qualified secondary education costs (including college and university tuition, housing, meal plans, and text books), then none of the income from the account is taxed. While there is no federal deduction upon funding the plan (some states such as NY allow for a small deduction), the fact that the income can be used tax-free is a substantial benefit.
I personally ended up saving for three years of my children's college tuition, and the fourth year tuition was covered by the income and tax savings of the plan. This is even after the horrendous losses sustained from last year's economic meltdown. (Prior to the meltdown, a good part of their graduate school had been covered as well). In New York (minimums can vary state to state) you can deposit as little as $25 or as much as $13,000 per donor per child. I use the term 'donor' because not only parents can give to these plans, but grandparents, friends, and others. While more than $13,000 per year per child is possible, I don't recommend you consider this option without consulting your accountant as there may be gift tax ramifications in exceeding that amount. A married couple depositing the maximum annually for their child can have that child's education at our most expensive private universities fully funded before that child is seven years old. Even depositing far less than the allowed amounts can fully fund a child's education well before age 18. You can check out how to open a plan with your local investment advisor or go online.
Stuart Gelwarg is a CPA and a partner in the firm of Altman, Greenfield & Selvaggi, LLP.
By Michael Tiedemann
We are at a fascinating point in history and have recently witnessed some remarkable and unnerving events in world markets. Never before has global wealth been so intertwined and capital markets been so linked. The problems within the Banking system, first materializing in 2007, spread to virtually all asset classes and created a global systemic deleveraging never seen before. Governments across the globe stepped in and began supporting the financial system in the 3rd and 4th quarters of 2008, especially the large financial players, in an effort to prevent a complete collapse of the system. From that point, virtually every central bank in the world has been injecting liquidity into the capital markets to revive their economies and help support asset values. At no point in history prior to this has there been a globally coordinated effort to pump liquidity into the financial system without apparent concern for the unintended consequences which may follow.
At the top of the list of these potential consequences is inflation. So, how does one invest to keep up with and beat inflation over time? Historically, investing in a blend of equities and commodities, with an appropriate amount of high quality bonds (treasuries, municipals and corporate) has achieved the goal of growing wealth and beating inflation over time. In our view, this approach remains sensible, with a few wrinkles. We develop portfolios by allocating assets to two basic types of investments: those that are protective of principle and those that put principle at risk in order to provide excess return. The allocation between these investments depends on the goals of the individual investor.
Within the risk bucket, we divide the world into three categories: corporate (both credit and equity), commodity and interest rate. We believe that a diversified portfolio should have exposure to both corporate debt and equity of businesses that have high levels of free cash flow and that distribute that free cash flow. Examples include consumer staples companies (low debt/high cash generation), investment grade bonds and dividend yielding stocks. These investments will typically lag in markets such as the one we have just been through these last six months (i.e., sharp rallies) but will buffer portfolios in times of stress, as the dividend yield becomes more important to the total return (as it was in the 1970s). Other elements to consider in diversified portfolios include commodities and gold. An investment in gold provides some inflation protection as well as some protection against a weakening U.S. Dollar, in effect, preserving purchasing power for U.S. investors. Exposure to commodity-related equities in sectors such as water, infrastructure, agriculture and other resource-based materials (oil, copper, etc.) give portfolios a healthy dose of economic cyclicality and inflation protection to balance equity exposure and allow participation in a global recovery. International equities (including the emerging markets) are the best way to participate in widespread global growth due to the wealth effect being created currently in emerging market countries. These investments will also provide some diversification away from the U.S. Dollar. This demographic trend, made possible by the increasingly wider availability of credit in these regions, will become very powerful in the years to come.
On the protective side (traditional fixed income), we favor short term treasuries (1-3 years) and believe that holding some cash (5-10% of portfolios) remains sensible. We are concerned about lower-quality municipal bonds because tax receipts are going to be slow to recover and because state and municipal budgets have yet to be reigned in to reflect this reality. The situation in California bears watching very closely.
Ultimately, much of the nation's debt bubble has now shifted from consumers to the Federal Government, likely leading to a continued devaluation of the U.S. Dollar, higher interest rates or both. In general, we are conservatively positioned, yet positioned for what we believe will be an inflationary outcome as the unintended consequence. We favor corporate risk that 1) generates and distributes free cash flow (consumer staples, dividend focused equity managers) and 2) will protect and thrive in a recovery or inflationary environment (commodity based equities). We are not comfortable taking much interest rate risk, as inflation is a real threat, preferring to own shorter term bonds (both treasuries and high quality corporate bonds). We believe that Gold and international equities will benefit from a weaker U.S. Dollar and long-term growth trends of the emerging markets. These components all translate into a portfolio designed to protect assets in volatile markets while still creating value and compounding assets through carefully placed bets and prudent allocations to risk assets.
Michael Tiedemann is a Senior Managing Director and Chief Investment Officer of Tiedemann Wealth Management. For more information, please visit www.TiedemannWealth.com.