By MoneyMorning.com.au
“‘Should the inflation outlook deteriorate, we will immediately take preventative action,’ [European Central Bank President, Mario] Draghi told the mass-selling Bild daily.” – Reuters
When a central banker talks about the inflation outlook worsening, we never know on which side of the fence they’re sitting.
Their public stance is to claim they’re keeping a watch on inflation. To make sure it isn’t too high.
But the history of central banking shows that inflation is the bankers’ best friend. They love inflation. In fact, it’s thanks to them that the western world has had almost non-stop inflation for over 40 years.
It ensures rising paycheques for bankers. More money in government coffers. And it forces individuals to work longer and harder. (Whatever happened to the single-income household?)
So, what’s the best way to beat inflation? Gold? Maybe not…
Gold should be in every investor’s portfolio.
It’s criminal that so few Aussies own gold.
But we see gold as an insurance policy rather than a millionaire-maker. That’s why we suggest you don’t put your entire wealth in it. 10-50% is enough. Depending on your view of the markets and global economy.
Because as we see it, if central bankers unleash another decade or more of steady inflation, the best way to beat them may not be gold at all. It could be stocks.
Look at this chart…
The green line is the Dow Jones Industrial Average from 1970 until the end of 2012. The red line is the gold price.
Now, as we’ve pointed out before, our view is you won’t see a repeat of the 1970s and 1980s credit-fuelled boom. That instead, the market will repeat the volatility of 2000-2011.
But what if we’re wrong?
What if bankers and pen pushers mess with the market so much that they do repeat the boom?
Well, if the past 40 years is a guide, then it’s not just gold you’ll want in your portfolio. You’ll want stocks too…
The biggest problem is that most diversified portfolios aren’t diversified. At the ‘After America’ investment symposium, we showed a balanced portfolio from a well-known firm.
It had 60% in shares. Thirty per cent in debt investments. Five per cent in property. And five per cent in other stuff.
In short, if shares fell by 20% or 40% there’s no way the other investments would rise by enough to cover the losses from shares. That’s not diversifying.
That’s why we urge you to adopt the 80/20 approach. Put 80% of your assets in safe investments – cash, term deposits, gold and steady dividend stocks.
The rest of your portfolio can go into riskier stuff – growth shares. (Whether that’s small-caps for explosive medium-term gains or blue-chips for explosive short-term gains is up to you.)
The point is, we’re convinced central bankers and pen pushers are leading western economies down the toilet. But you must also prepare for the chance they can keep going with their deadly experiment in central banking and unsound money.
Think about it. They’ve strung things out this long. Who’s to say they can’t string things out another 80 years?
But assuming they will is dangerous to your and your family’s wealth.
Betting on the stock market has proven to beat inflation over 40 years. And as the modus operandi of central bankers is to create inflation, it makes sense to own stocks.
You should buy stocks on down days like today. But you have to do it sensibly. Make sure you have plenty of ‘safe’ money set aside. And what remains, invest carefully in the market.
Because if inflation takes off again, you can be almost certain stocks will follow suit. And you don’t want to be left behind if that happens.
Cheers.
Kris.
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