By Kris Sayce
In yesterday’s Money Morning we signed off with this thought:
“Think about it this way: the long-term average annual gain for stocks is about 11% per year – give or take a few per cent. But if you play smart, you can make roughly half of that by sticking a wad of your money in cash or a term deposit.
“The trick, of course, is how to make up the extra 5-6% you need to mirror the long-term performance of stocks?
“That’s where you use stock market leverage, volatility and risk to your advantage.”
But before we get stuck into that, a quick note on this year’s Gold Symposium. This is an event our colleague, Australian Wealth Gameplan editor, Dan Denning has spoken at for the past few years. He’s speaking at this year’s event too.
As an added bonus for attendees [wink], your editor is set to chair day two of the Gold Symposium.
Keynote speakers that day include Eric Sprott of Sprott Asset Management, based out of Toronto. And Ben Davies of Hinde Capital, based in London.
If you’d like to check out the programme, click here. And if you’d like to register for the two-day event in Sydney at a cost of just $199, click here.
Oh, by the way, we don’t get a kickback or anything if you register. We just mention it because it’s something we think you may be interested in…
And as you know, gold is one of our must-have components in an investment portfolio. And we don’t just mean the 3-5% rubbish some of the mainstream advisors now recommend. They’ve just jumped on the bandwagon so they can say, “Yeah sure, we recommend gold…”
But even those guys are in the minority. 98% of financial advisors wouldn’t have a clue about gold, let alone recommend it.
Anyway, you know our position on the shiny metal. So we won’t labour the point. There are other things to discuss…
Back to yesterday’s cliff-hanger: just how do you make up the extra 5-6% you need to match the long-term performance of stocks?
The first answer I can give you is: don’t invest in an index. For the past 10 years, the S&P/ASX 200 has gained a whopping… 26.4%.
That’s an average non-compounded gain of 2.64% per year. That’s terrible.
Of course, if you add dividends, the result is better… From June 2001 to June 2011 you would have doubled your money, assuming you were able to reinvest all dividends.
But here’s the thing. Most of the return has come from income, not capital growth.
That tells you, for growth investors, betting on the index and blue-chip stocks won’t get you anywhere fast.
Most of the return – three-quarters of it – has come from income. But in order to get the income, investors have had to sit through an extraordinary period of gut-wrenching market volatility. To sit back and keep cashing the dividends while stock prices fall takes nerves of steel.
But let’s be honest, most folks don’t have nerves of steel. Most aren’t hardened investors… they’re just people who want to make a decent living.
People who want enough saved for retirement so they don’t have to live off tinned hotdogs, wear op-shop clothes or rely on the crappy public health system.
What we’re getting at is this: why have sleepless nights with all your cash in the stock market if the stocks you’ve invested in are only giving you income rather than capital gains?
Why wouldn’t you relax by having most of your cash tucked away in the bank? (We’re no fan of the banks. That’s why you should hedge your cash position by holding a decent position in gold.)
But, that doesn’t mean you should put all your cash in the bank. Not while there’s the opportunity to use leverage, risk and volatility to your advantage.
The key is not to play along with the crowd. Because the crowd is rigged by vested interests. It’s a game they’re playing, using their rules… and your money!
A perfect example is Warren Buffett’s deal to buy part of Bank of America [NYSE: BAC]. When the news was announced, investors loved it. They bought Bank of America shares on the news. The share price rallied 20%… “Well, if Warren’s buying, it must be good.”
But it isn’t. Warren’s getting his own deal. In fact, under the structure, it’s actually bad news for other Bank of America investors because he gets an almost guaranteed 6% dividend yield while ordinary shareholders get an unguaranteed 0.55% yield.
Warren is playing for the other side. He’s not playing on the same team as you. That means you shouldn’t do what he does, you should do the opposite to what he does!
For a start, it means buying gold, holding cash for a 5% or 6% compounded return and then using just 10-20% of your savings on strategic investments.
How so? Let us explain…
We’re not saying shares are a bad investment – that would be strange for a publisher of financial newsletters. But you’ve got to be smart with investing. You’ve got to understand how the market is rigged against you, and what you can do about it.
The best way to handle it is to through Risk, Volatility and Leverage:
Now. Don’t ask us how much you should invest in each area. That’s up to you. The most important thing is to do what’s comfortable. If you’re not comfortable trading, then don’t do it – it’s not the end of the world if you don’t.
But it may mean increasing your exposure to small-cap stocks, or putting a bit more into stocks that pay a dividend – or any other way of giving your returns a little boost.
But whatever you do just remember that when central bankers, politicians and mainstream advisors tell you something has to be done to save the economy, what they’re really saying is, “This is what needs to be done to save our own necks, and you – the taxpayer – have to pay for it.”
Don’t fall for it.
Cheers.
Kris