Friday, October 31, 2008

Global Investing And Gold Have Failed Us

Global Investing will Never be the Same
It's highly likely that an entire generation of investors will never return to stocks again following the worst drubbing for equities in a single month since the spring of 1932.
It's also likely that many retirees will never buy another stock or mutual fund. And younger investors will probably shun stocks altogether because of the enormous losses suffered by benchmarks over the last 12 months - a major deterrent for new long-term investors planning for retirement or college.
Global stock markets have collapsed 25% in October - a record.
Since reaching an all-time high in October 2007, the MSCI World Index has crashed more than 45%, the S&P 500 Index is down 43% and the MSCI Emerging Markets Index is down a mind-boggling 65%.
These numbers are the worst annual returns for U.S. stocks since 1930 when the Dow plunged more than 33%. The spectacular loss of wealth, affecting both large and small investors alike, will deter investors from jumping back into stocks again for a long time.
But it's not just the huge declines over the last 12 months acting as a brick-wall deflecting long-term investment capital; U.S. and global stocks have been flat over the last ten years and adjusted for inflation have actually declined about 4% per annum.
Japanese stocks - mostly in the grip of a deflationary bear market since peaking in early 1990 - have declined 1% per annum since 1986.
Returns like those above don't exactly encourage long-term money-flows.
Mutual funds, exchange-traded-funds (ETFs), private equity funds and hedge funds have all failed miserably over the last 12 months. It's actually quite appalling that active money-managers didn't move more money into cash, Treasury bonds or apply hedges like reverse index ETFs or short-selling contracts, to protect their stocks.
Hedge funds get a big F, too. These guys are supposed to "hedge," but instead were mostly "leveraged" like hell and have been slaughtered since July. I'm not sure what these hedge funds are doing but it's certainly not hedging. Many deserve to close and many will.
As we move forward, investors must learn how to hedge their portfolios to protect against the next financial crisis - or possibly - the next phase of this bear market. That means using reverse index ETFs to cover your stock market exposure. This is a simple, cost-effective and liquid strategy that can protect your investments in a bear market.
For example, if you own stocks that you truly don't want to sell (tax reasons, great dividends, strong franchises, low prices, etc) then at least cover your exposure to neutralize your risk. Why mutual funds and hedge funds don't do this I'll never understand.
Let's suppose a portfolio has $100,000 invested in stocks; I suggest the same amount should be invested in reverse ETFs. At the very least, a one-for-one hedge should leave you flat or almost unchanged in a big market decline or rally. I did this starting in September for my U.S. managed accounts and since September 1st our portfolios have declined just 1% versus a stunning 35% loss for world markets. Sure, I'm still down 8% in 2008 but at least I won't have to work my way through a 40% draw-down like the benchmarks.
My only regret was not doing this sooner. Gold failed, gold stocks were massacred and high quality corporate bonds plunged. Only reverse indexing has worked to cushion the markets' mighty blow.

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