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The Best and Worst Investments For the NEXT 5 YEARS!

Stock-Markets / Resources Investing Aug 01, 2008 - 11:16 AM GMT

By: Money_and_Markets

Stock-Markets

Best Financial Markets Analysis ArticleLarry Edelson writes: I often discuss what I think are the best investments out there. But this morning, I'm going to spend some time talking about what I think are the worst investments for today, tomorrow and the next five years.

Obviously, given the state of our economy and financial markets, there are a lot more lousy investments than there are good ones.


But don't worry: It's not all bad. By the process of elimination, we'll get additional confirmation of what the best investments are!

Five Lousy Investments For the Next Five Years

These lousy investments are major asset classes where I believe — based on all my indicators and analysis — you will either ...

Suffer massive depreciation in the purchasing power of your investment. You may get a nominal rate of return of say, 5% or 6%, but after accounting for the "real" rate of inflation, you will be losing purchasing power.

Or ...

Incur the worst of both worlds: Lose in terms of purchasing power AND in terms of nominal dollars. In other words, invest $10,000 and get back $5,000 at the end of five years — but that $5,000 is only worth $2,000 in terms of purchasing power (because of the falling dollar and inflation).

Having said that, here's my list of lousy investments for the next five years ...

Lousy Investment #1: Bonds

I mean corporate, municipal, bonds of Government Sponsored Entities (GSEs) like Fannie Mae and Freddie Mac, and longer-term U.S. Treasury bonds.

The reasons are pretty simple: It's going to take years for this country to recover from the current financial crisis and the damage it's incurred. And all the while, there will be loads of uncertainty surrounding the bond markets.

At times, that uncertainly will come through in the form of rising interest rates, meaning the principal of the bonds will have to decline.

At other times, it will arise from the lack of liquidity now surrounding the credit markets, the falling value of the dollar, uncertainty in corporate earnings, companies going bankrupt, and more. All of these forces will negatively affect the value of most, if not all, bond markets. And cause you to incur losses.

The worst of all? Most likely the U.S. Treasury bond market. Five-year and longer-dated Treasuries. Reason: Their prices are inextricably intertwined with the value of the dollar and its perceived credit-worthiness.

But as we all know, the dollar is not what it used to be. A long time ago, it was backed by gold. Then it was backed by the full faith and credit of the U.S. government. That wasn't so bad, until the credit crisis hit.

Today, the faith part is losing respect all over the world.

And the credit part of the equation is also crumbling, as Washington bails out one company after another, printing paper money like crazy and accepting junk bonds as collateral.

In fact, as much as 22% of the Treasury's balance sheet is now comprised of junk bonds. That devalues the dollar and the Treasury bonds that are issued based on the dollar.

I think typical Wall Street staples like U.S. stocks and bonds will make lousy investments over the next five years.
I think typical Wall Street staples like U.S. stocks and bonds will make lousy investments over the next five years.

So I suggest you stay away from the bond markets. Period. Their prices are only going to fall as interest rates are forced higher by the marketplace to try and attract investors. You don't want to be in bonds as that process unfolds.

Lousy Investment #2: Real Estate in the U.S.

While I say "in the U.S.," most real estate in most parts of the world will also be a lousy investment for the next five years. The only exceptions: Select properties like waterfront (here and overseas), and the Asian property markets.

Real estate values in the U.S. will stabilize and even bounce back a bit over the next five years. But, just as the bursting of the tech bubble put an end to the potential gains in that sector, the real estate market in general in the U.S. will never again experience the kind of bubble gains it did over the last several years. At least not in my lifetime.

There will be some bouncing back, as I noted, but it's highly likely that any positive returns you see in the property markets going forward will simply not keep up with inflation. To me, that makes for a lousy investment.

Lousy Investment #3: U.S. Stock Markets

The broad stock markets here in the U.S. — as defined by the major indexes like the Dow Jones Industrials, the S&P 500 and the Nasdaq — are going to destroy your money over the next several years.

I've told you before they have already zapped 72% of your money, in a giant stealth bear market .

And I showed you how the Dow could lose a heck of a lot more .

Do not underestimate it. Because the dollar has lost so much purchasing power, the value of our stock markets is also getting slashed, in what I call "The Squandering of America."

For instance ...

As you can see from the chart I made for you today, at the end of 2000, the market cap of the Dow Jones Industrials (DJI), the 30 "bluest" of the blue-chip companies in the U.S., was $3.81 trillion. That was equal to 14,025 ounces of gold.

Today, the market cap of the Dow is $3.67 trillion. Yet it takes only 3,952 ounces of gold to buy 100% of the 30 companies in the Dow.

In nominal dollars, the loss is $140 billion, or 3.6%. But in terms of real money, gold, the loss is a staggering 71.8%.

As the dollar continues to fall in value, as it most assuredly will, the losses in the broad stock market averages will widen. In fact, they will get worse, as the averages decline both in nominal terms and inflation-adjusted terms (based on gold).

That will put the U.S. stock markets amongst the worst investments you can park your money in, now, and for at least the next five years.

Ditto for ...

Lousy Investment #4: European Stock Markets

Yes, the euro currency is very strong. And that will help mitigate the losses investors are experiencing, and will continue to experience, in the European stock markets.

But Europe suffers from many of the same problems the U.S. does: Overheated real estate markets that are now imploding, large derivatives exposure amongst Europe's banks, and more.

So Europe's stock markets will continue to lose, both in nominal terms and in terms of gold. They just might not lose as much as U.S. markets.

Either way, I suggest steering clear of Europe's stock markets.

Lousy Investment #5: Most of Latin America

This includes both stock and bond markets south of the border. The big exception in my book is Brazil.

That's because most Latin American economies, Mexico included, are too closely tied to the fate of the U.S. economy. Even more so than Asian economies such as China and India.

Sure, Mexico and Venezuela have oil. But the former is too dependent on the U.S, and the latter I wouldn't touch with a 10-foot pole due to dictator Hugo Chavez.

So if you're looking south of the border for investments, I'd look elsewhere.

Now, let's move on to my list of what I think are the best investments for the next five years ...

Best Investment #1: Gold!

There's no doubt in my mind: If you want to preserve the purchasing power of your dollars and make some healthy profits above and beyond the rate of inflation, by far the best investment of all is pure, honest, real money that has stood the test of time for more than 6,000 years — gold!

Gold is real money, and cannot be created or destroyed by any politician.
Gold is real money, and cannot be created or destroyed by any politician.

Gold has always preserved its purchasing power. And today, more than ever before ...

You need an asset that cannot be manipulated by the powers that be ... that has no politician to answer to ... no board of directors to dilute it by issuing stock and stock options ... and no gimmicky accounting to establish its fair market value.

Also not to be ignored: Platinum, palladium and even rare metals, such as rhodium and cobalt, which I will cover in my upcoming issue of Real Wealth Report .

Best Investment #2: Energy

Not just crude oil and gas, but also alternative energy.

Right now, the price of crude oil is pulling back in a normal, healthy retracement. I expect oil to trade as low as $107 a barrel. But then, Phase II of its bull market will kick off, sending the price as high as $200 a barrel. A gallon of unleaded gas will ultimately hit $5, perhaps even $6.

Oil & gas companies, once the current oil pullback has run its course, will be awesome buys. Many of them are trading at price-to-earnings ratios of less than 10, when they should be trading at double that.

Alternative energy plays in solar, ocean motion, nuclear energy, and wind are also great longer-term investments. But as with oil and gas, wait for my signals!

Best Investment #3: Natural Resources

In this category I group all other natural resources including agricultural commodities, soft commodities such as coffee, cocoa and sugar, base metals such as aluminum, copper, nickel and zinc, fertilizers, and last, but not least, water.

All are assets where supplies are limited, and where demand (largely due to Asia's growth) continues to grow at a rapid pace.

All are tangible assets with intrinsic value, and where real wealth is accumulated.

Best Investment #4: Economies that are driving demand for natural resources higher.

Reason: They are the economies that are also largely driving global economic growth these days. Countries like India and China. Indonesia and Malaysia. And more!

Best wishes,

Larry

P.S. If you're not on board my favorite investments as recommended in Real Wealth Report , it's not too late. By the time the crisis hitting the U.S. is over, gold will be trading at more than $2,000 an ounce.

My next issue will also tell you what other metals I'm recommending right now. So if you're not yet a Real Wealth Report subscriber, sign up NOW !

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Peter Roberts
05 Jan 09, 10:48
Wrong?

Well only a few months down the road and what a difference. The so called "EXPERT" couldnt have been more wrong. Obviously nobody knew what was going to happen, So it goes to prove that NOBODY is an expert.


that guy
26 Sep 09, 00:57
marijuana

lets be honest: its the number 1 cash crop above corn in this country, its equal, or less, harmful than alcohol & tobacco, And for those that it helps medically in the states where it is becoming used for medicinal purposes, it is probable to estimate great profit margin to those that open the first dispensaries and/or growers for the dispensaries. Its not the answer to the nation's economic problems, just one aspect that I bring attention to as I am not a user but am pro legalization for taxation.


me
10 Jan 10, 18:25
...or not

@Peter,

You can't say if a prognoses for the next 5 years is wrong (or right) after a couple of months :)


DEEZ
17 Oct 10, 23:53
Need ideas

I am trying to find the best thing to invest my money in, I thought of real estate and oil mining but I'm not to sure, looking for ideas &/or suggestions thank you


Rick
18 Oct 10, 12:55
The Best Investment: Series I Savings Bonds & TIPS

DEEZ: My best advice is to invest your money in inflation protected U.S. government securities such as U.S. Series I Savings Bonds and/or TIPS. I personally prefer U.S. Series I Savings Bonds, but they unfortunately now have a strict purchasing limit. Moreover, these particular bonds will not track the CPI as closely as TIPS, but the accrued interest from the Series I Savings Bonds can be deferred until either the bonds are redeemed or have reached maturity. That can prove to be a godsend in an environment of heavy taxation.

TIPS is another option, but I have never purchased these securities for myself. However, when dealing with relatively large sums of money, these particular securities would be the way to go. Unfortunately, any accrured interest from TIPS is taxable during any calendar year, and that could spell a severe handicap when taxes on everything will soon reach the stratosphere.

Now some pundits on this site will claim that TIPS will not protect you because the CPI is not a true indication of inflation. They are correct in this, but at least one is not going to lose the store by holding TIPS.

One is certainly not going to get rich by purchasing these particular securities. However, the main goal is to try to protect as much of the principal as possible during these tramatic times, and these securities provide a way.


Shelby Moore
19 Oct 10, 13:23
Gold is outperforming TIPS

Even outperforming the Dow also since 2001 and since 2007, OUTPERFORMING by double-digits per year.


Rick
19 Oct 10, 17:09
Amway & Rothschild

Shelby: Have you ever purchased a market security in which the vast majority of the shares was controlled by just a precious few players? Remember Amway Corporation's stock buy back plan in 1999? The same analogy holds true for gold.


Shelby Moore
19 Oct 10, 23:15
Silver held by masses

Not true for silver, which is widely held by the masses:

http://www.coolpage.com/commentary/economic/shelby/Silver%20Up%20To%205x%20More%20Rare%20Than%20Gold.html

I expect silver supply to plummet when China does:

http://goldwetrust.up-with.com/precious-metals-f6/silver-as-an-investment-t33-255.htm#3777

And so you prefer to take paper IOUs which Rothschild can print ad infinitum?

Take silver, it will make you rich beyond your wildest dreams. Buy at $21 on this coming dip and then hold until $47, then trade for gold (do you report that to IRS?), then wait for silver crash, then trade for silver again. You will be one your way to beating just about every other investor on the planet.


Frenk
20 Dec 10, 17:16
Thanks

Now some pundits will claim that TIPS will not protect you because the CPI is not a true indication of inflation. They are correct in this, but at least one is not going to lose the store by holding TIPS.


Rick
21 Dec 10, 12:48
Frenk: You're Welcome!

Frenk: You're welcome. You know, one has to pity pundits who are forever praising the virtues of holding gold and silver. One has got to believe that these same people are doomed into spending sleepless nights forever worrying if their holdings will tank tomorrow.

And can you blame them? Most of the world's gold and silver reserves are held by an assortment of commodity trading houses and a whole slew of central banks including such powerhouses as J.P. Morgan Chase and the Bank of England. I think that should speak for itself.


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