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Lately I have been sleeping like a baby – asleep for an hour … and awake for an hour. So lying awake at night what do I think about? The financial markets, investments and FIM Group portfolios, of course. What follows are some of the issues (both large and small) that I think about, but I realize that every worry is also an opportunity. For example, we think that housing, retail and the U.S. banking industries will have a very tough few years – so the opportunity is simply don’t invest in those sectors! Similarly, we see significant forces around the tangled, complicated fight of the weakening U.S. dollar, deflation and inflation, and thus see significant opportunities to grow and preserve wealth by investing appropriately based on our analysis of how we see those forces playing out. So here are some of the key long-term trends we are watching.
America’s Relevance
FIM Group has always been about investing globally, so it is nothing new for our clients to hear about the robust opportunities that exist all over the world. In some ways I think that the world is realizing that the good ‘ole USA is not as necessary to their security, safety, well-being and economic prosperity as it once was. There is a new generation globally, and they have little patience for the stories told by their old folks of how the U.S. helped in their country’s development. I think the U.S. got lazy. Now after many years of benign neglect our political clout, through an unfocused and politicized myopic foreign policy, especially around economic issues, has helped us lose some of our relevance in the world. In addition, the world (especially Asia) has simply grown. What is heartening to me as a proud American is that as a percent of the world’s big, fat economy of around $60 trillion, the U.S.’s share has been pretty constant. Europe has been the bigger GDP loser, and while Africa and Latin America have had benign growth, Asia has been where the big change has taken place. Asia is coming into its own, saying, “Hey, we are relevant, we are strong and we can sit at the table of the world’s richest nations because we earned it!” Like a teenager that forgets all the help and guidance of the parents, Asia (as will other countries as they develop) will wish to cut the umbilical cord to the West and with national pride be indifferent to those who helped them along. The talk show hosts that got mad at France, chatting of boycotts and changing the name of “French fries” a few years ago for differing with us on our foreign policy, are a good illustration of this. The U.S. exists because the French helped us kick the English out. It’s that simple! Most of Asia exists because 60 years ago we helped China and other Asian countries defeat Japan’s armies.
About 16 years ago I was on a rickety boat off the coast of Mersing, Malaysia. An older man who was navigating among the fishing vessels in our small boat heard my American accent and said, “Oh, you’re an American! Thank you! I vowed to always say thank you to every American I meet for all the help you gave our country.” I am a proud American because of encounters like that. However, in the world we see today, our military influence has much less clout in today’s world where economics rules. The free world today gets a free ride on America helping to police the world, and just as Rome, England and the warrior Kings of Africa learned, military might does not tend to evolve or help maintain economic might. Healthy countries want to take care of their own security needs; naturally they will take our help for free, even if they don’t need it. The economic drag of America’s war machine, the conflicts in which we are engaging, our aging population … all these things will contribute to the fact that big opportunities for our wealth is overseas, in countries with lower taxes, younger work forces and lots of room for development.
I hope that my comments will not make readers feel worried, sad or even angry. They are not intended to be political, and they should not be taken as a statement of my personal political opinion. The U.S. needs a strong defense, because the world is an unsafe, scary place. There are plenty of people who would like to see the West destroyed. Fortunately we can afford to have a giant military that costs more than all other defense spending in the world combined. But, unfortunately the cost is growth, our clout in the world, higher taxes and our brave men and women fighting in Afghanistan and Iraq.
We Are Rich!
According to the UN News Centre, America has around $144,000 in wealth per capita vs. the global average of $20,000 average and just $1,100 in India (data based on the year 2000). Both the U.S. and the world’s wealth have grown since then, but we still are the richest country per capita.
America is so rich that even though we have some erosion effect from our burgeoning government spending and aging 
population, we will always be rich. We work hard, believe in education, solve problems and learn from our mistakes. Right now we are finding our place in the world with wars, a new president, special interests and a plethora of other issues. It is natural that our foreign policy will be centered on the handful of countries with whom we are fighting. Meanwhile, China, Europe and others have policies that nurture relationships with resource-rich nations, and the buyers of their goods and services ensure their future growth. Bottom-line growth in America will be slower than elsewhere.
Invest Slow or Fast? Easy Choice
Investors are silly folks. They are collectively stubborn. Because of endowment behavior most investors will stay with an investment even if they expect it to under perform, because their brains are wired to do so. Many investors will naïvely invest in benchmarked or indexed portfolios of mainly U.S. stocks or bonds even though they know that many areas of our economy, such as real estate, retail and banking, have crummy prospects. They will stay in U.S. bank CDs even thought they believe the U.S. dollar is destined to continue to erode in purchasing power and inflation is most likely around the corner.
It is rational to have a diversified portfolio, and we are believers in diversification. With more than 50,000 stocks and millions of bonds to invest in, an investor would be either silly or lazy to choose investments that they know have poor prospects going forward, like U.S. banks and real estate. So sometimes when I am lying awake in bed, I reflect on our investment year and ask, “What am I missing?” It seems so rational that there will be – although lumpy – growth in energy, food, agriculture, health care, telecommunications and emerging countries, and that inflation with pockets of deflation is most likely in our future. Therefore, those are the themes that are well-represented in our diversified portfolios.
Retired and Portfolio-Dependent Clients
Many of our clients are retired and dependent on their portfolios for income now and in the future. That future might be the next 40 years or next month. I can tell you with certainty that the future will have inflation, deflation, recessions, corporate scandals, Wall Street greed, war, booms and changes in tax laws, high interest rates and low interest rates. Dividends will be taxed a little, and they will be taxed a lot. I can tell you that thousands of books and tens of thousands of articles will be written stating the absolute best way to invest. I also can tell you that most investors will fail to meet their goals, because they fail to have a common-sense long-term view, and clear goals and objectives of what they expect from their portfolios.
At FIM Group we are guided by a common-sense philosophy and fiduciary duty, and each portfolio has goals and objectives that are built into their construction and management. Investors not guided by goals and a long-term view often panic in crashes and are seduced by slick salespeople and logical-sounding strategies (note the Dalbar chart on the right).
Lying in bed, in my head, I go over each portfolio’s position. I ask myself, “What if we have hyperinflation, another crash or a super-strong economy?” Or, “What if rates stay near 0% for money markets, CDs and other so-called ‘safe’ investments?” CDs and the like don’t give inflation protection, nor do they protect against U.S. dollar weakness or an eroding currency environment. I scenario out the possible futures and “stress test,” so to speak, our portfolios against each scenario.
To learn about wealth management advice from the best wealth management firm, Financial & Investment Management Group -more please visit www.FIMG.net or call 800.632.5528.
