Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Who is Spreading the Virus? UK Coronavirus 2nd Wave Analysis - 30th Sep 20
Gold And Silver Follow Up & Future Predictions For 2020 & 2021 – Part II - 30th Sep 20
The Only Thing Systematic Is The Destruction Of America - 29th Sep 20
Fractional-Reserve Banking Is The Elephant In The Room - 29th Sep 20
Gold And Silver Follow Up & Future Predictions For 2020 & 2021 – Part I - 29th Sep 20
Stock Market Short-term Reversal - 29th Sep 20
How Trump co-opted the religious right and stacked the courts with conservatives - 29th Sep 20
Which RTX 3080 GPU to BUY and AVOID! Nvidia, Asus, MSI , Palit, Gigabyte, Zotac, MLCC vs POSCAPS - 29th Sep 20
Gold, Silver & HUI Stocks Big Pictures - 28th Sep 20
It’s Time to Dump Argentina’s Peso - 28th Sep 20
Gold Stocks Seasonal Plunge - 28th Sep 20
Why Did Precious Metals Get Clobbered Last Week? - 28th Sep 20
Is The Stock Market Dow Transportation Index Setting up a Topping Pattern? - 28th Sep 20
Gold Price Setting Up Just Like Before COVID-19 Breakdown – Get Ready! - 27th Sep 20
UK Coronavirus 2nd Wave SuperMarkets Panic Buying 2.0 Toilet Paper , Hand Sanitisers, Wipes... - 27th Sep 20
Gold, Dollar and Rates: A Correlated Story - 27th Sep 20
WARNING RTX 3080 AIB FLAWED Card's, Cheap Capacitor Arrays Prone to Failing Under Load! - 27th Sep 20
Boris Johnson Hits Coronavirus Panic Button Again, UK Accelerting Covid-19 Second Wave - 25th Sep 20
Precious Metals Trading Range Doing It’s Job to Confound Bulls and Bears Alike - 25th Sep 20
Gold and Silver Are Still Locked and Loaded… Don't be Out of Ammo - 25th Sep 20
Throwing the golden baby out with the covid bath water - Gold Wins - 25th Sep 20
A Look at the Perilous Psychology of Financial Market Bubbles - 25th Sep 20
Corona Strikes Back In Europe. Will It Boost Gold? - 25th Sep 20
How to Boost the Value of Your Home - 25th Sep 20
Key Time For Stock Markets: Bears Step Up or V-Shaped Bounce - 24th Sep 20
Five ways to recover the day after a good workout - 24th Sep 20
Global Stock Markets Break Hard To The Downside – Watch Support Levels - 23rd Sep 20
Beware of These Faulty “Inflation Protected” Investments - 23rd Sep 20
What’s Behind Dollar USDX Breakout? - 23rd Sep 20
Still More Room To Stock Market Downside In The Coming Weeks - 23rd Sep 20
Platinum And Palladium Set To Surge As Gold Breaks Higher - 23rd Sep 20
Key Gold Ratios to Other Markets - 23rd Sep 20
Watch Before Upgrading / Buying RTX 3000, RDNA2 - CPU vs GPU Bottlenecks - 23rd Sep 20
Online Elliott Wave Markets Trading Course Worth $129 for FREE! - 22nd Sep 20
Gold Price Overboughtness Risk - 22nd Sep 20
Central Banking Cartel Promises ZIRP Until at Least 2023 - 22nd Sep 20
Stock Market Correction Approaching Initial Objective - 22nd Sep 20
Silver Bulls Will Be Handsomely Rewarded - 21st Sep 20
Fed Will Not Hike Rates For Years. Gold Should Like It - 21st Sep 20
US Financial Market Forecasts and Elliott Wave Analysis Resources - 21st Sep 20
How to Avoid Currency Exchange Risk during COVID - 21st Sep 20
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Dot.com Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Investment Advice for My Children & Grandchildren

InvestorEducation / Learning to Invest Sep 13, 2017 - 03:00 PM GMT

By: Axel_Merk

InvestorEducation

Okay, so I don’t have grandchildren yet, but I want to increase the odds you read beyond the title if you are old enough to have grandchildren. Should the investment advice we give to someone young truly be different from that given to someone old? And given where asset prices are, is it responsible to tell anyone to pile into the markets? Here are my thoughts on the topic, hopefully applicable not just for my children:

Hedge fund manager Ray Dalio likes to say he chose the first stock he ever bought because it cost less than $5 a share, given that his savings from caddying at the time were, well, five bucks. That story is a great icebreaker but also highlights with what’s wrong with our industry: when we think about investing, we immediately think about the stock market. Let’s take a step back.


My oldest recently returned back to college having completed a summer job. Thanks to our “Golden College Fund” (our kids’ college savings is in physical gold; please see this 2014 Forbes article for details), our son in the fortunate position that he doesn’t have to pay off college debt with his earnings. If he did, paying off college debt – like any other debt – is a choice of whether one expects a higher rate of return with one’s investments (after tax) than if one were to pay off the debt. It’s also a choice of risk tolerance, as a debt-free person has much less to worry about.

Talking about worrying: the advantage a college kid without debt over just about any other adult has is that he or she has no obligations, notably also no family to feed. I allege that financial stress is foremost a function of expenses, not income.  As we grow older, we start piling on obligations: it starts with the indispensable mobile phone plan, might include that monthly car payment and possibly a mortgage. And if one is providing for a family, that too will take a good chunk out of the household income statement.

As such, for college students, life is comparatively simple. That said, it might be a worthy exercise for anyone in a more complex stage in their life to re-evaluate where they are. Most have “legacy” payments they make, but do you really still need that $80 a month cable TV subscription? Or, at the more expensive end of the spectrum, that vacation home that’s a money pit; should it be sold or possibly turned from an expense leader into a revenue center by making it available on Airbnb?

Have you ever noticed that if you go to a financial adviser, they’ll only recommend what they are licensed to recommend; or what their custodian can keep on their books? When it comes to investing, the first question you should ask yourself is not where to open a brokerage account, but what it is that you want to achieve. The brokerage account may merely be the means of achieving your goal.

Many say young investors can afford to invest more aggressively because they have more time to recover from market crashes; again, the emphasis is on stocks. I would like to phrase it differently: a young investor has a very high earnings potential relative to their current savings. Let’s say you make $50,000 coming out of college, with $5,000 in the bank. The way I like to look at it is that the $50,000 is a revenue stream you are getting from the investment you have made in yourself, one that’s likely to increase over time. It’s for that reason that you can be more aggressive with those $5,000. And that applies no matter what age you are: if you are an executive making hundreds of thousands, evaluate the odds of that income stream holding up, and put that into the context of your savings (which are hopefully higher at that stage in your life).

For a young person, it may be all but impossible to fill in a questionnaire about one’s target retirement age.  I gather it’s difficult even for many fifty-year-olds: sure, we all dream of retiring on the beach. But many of us – I include myself here – are not dreaming of retirement: we need to keep our brains active, and the last thing we want is to become couch potatoes. Relevant for any financial planning is that in the opinion of yours truly, income derived from one’s personal labor ought to be seen as a revenue stream just like any other, with probabilities assigned as to the future course of such revenue.

If along the way, you have invested in a vacation home that you are now renting out; that is an income stream as well (net of expenses, taxes, etc.).

If one reaches the point in one’s life where one no longer wants to or is no longer able to “have a job”, well, then that income stream is cut off. Although even there, with regard to financial planning, I would like to pose the question: how healthy are you? That is, could you go back to work if you wanted or needed to? In my opinion, one you don’t often hear from financial planners, one of the better pieces of retirement investment advices is to invest in your health. If you are healthy at age 65, you have the potential to keep that revenue stream going, even if you end up choosing not to. That, in turn, improves your risk tolerance.

The beauty of one’s personal earnings power is that one can control it far better than an investment one buys with the push of a button. When you buy that hot internet company, you have no control over management (with some firms there aren’t even voting rights associated). My personal view is that the riskier an investment, the more involved you want to be. For example, to make money in frontier markets, don’t be surprised if you lose your shirt if you give someone else your money to manage; a more profitable strategy may be to roll up your sleeves and get a job working there? No, it’s not unrealistic, especially not if you are young. Isn’t it all about “experiences” for the young generation? Well, here’s your chance!

Instead, your friendly financial planner will ask you about your risk/return profile. What the heck does that mean? We all know how much upside risk we can tolerate (an infinite amount?!), but who understands the abstract notion of downside risk? Investors start to appreciate these concepts as they gain experience; and “experience” means a series of setbacks, including possibly a job loss that gets one to re-evaluate those expectations of ever higher salaries.

The concept of risk goes far beyond the standard deviation of a return stream of a security. The risk any investor faces is that the net present value of their expected future cash flows falls below a comfort level, taking into account not all investments are liquid (either because they are difficult to sell or one doesn’t want to sell, such as possibly one’s home). Here, college kids have a lot in common with the wealthy: they can go several years without income. A good time to start one’s own business may well be when one is young, as one doesn’t have to worry about dependents. It is more stressful (the risk is higher) to start a business if one has to support a family at the same time. Entrepreneurs in their 30s and 40s might have more experience, reducing the anxiety level as their odds of success increase. Yet there are successful entrepreneurs that started only in their 50s or later; the kids are usually out of the house; and they have few other obligations, so they can go all in to focus on that business armed with decades of experience.

The biggest investment we possibly make is in our own training. Another life choice investment is that of who one shares one’s life with. I’m not suggesting ‘investors’ should marry for wealth, but marriage will have an impact on one’s financial stability. Independent of whether there are one or two breadwinners in a household, a frugal spouse will reduce financial stress; also, a broken marriage can put a serious dent into anyone’s financial planning.

When we buy a gadget, many of us spend hours surveying the market until we are comfortable we are getting value for money. We should do the same with any investment. Just because we can buy something with the click of a button doesn’t mean we shouldn’t take our time before taking action.

In my view, a hallmark of successful investors is that they understand the market they are in. For the very young entrepreneur, it might be that lemonade stand. When I was in college, I bought a washing machine that I rented out to my housemates in off campus housing (great return on investment!). In the stock market, this might be as simple as buying shares in the Coca-Cola Company because they think their drinks are a good cash cow (this isn’t investment advice). But what I have a problem with is to invest in something simply because “everyone else” says it’s a good investment, even if it’s something as “obvious” as tech stocks in the late nineties or real estate in 2005.

Gradually shifting towards the markets, I do not think there’s a unique right approach. But what I think successful approaches have in common is that there’s a process. And the process is more than signing up with a robo-advisor. Don’t get me wrong: there is value in automated re-allocation, and we’ll see it transform the industry, but the first generation of robo-advisors still has some maturing to do.

Whatever we invest in, once we make the investment, the temptation is to justify the investment even as the reasons for the initial investment has changed. A prime example is one’s primary residence. Many perceive their own home to be of great value, even if prices in the neighborhood have moved to ridiculous levels. Or take that stock you purchased; you don’t want to admit you made a mistake as the price moves against you. It gets back to process; it’s also usually best to recall why you purchased something in the first place; if those conditions are no longer met, do you make the data fit the story, i.e. are you merely justifying past decisions? That’s where starting with a clean slate is a great advantage. That said, any sixty-year old investor can go through the same exercise: if I didn’t own xyz, would I buy it today? Okay, do take into account that you might have to pay substantial taxes if you liquidated an investment, does xyz make sense in your asset allocation? If not, you may have put enough money aside so that you can afford to keep a pet project around, but at least be honest about it.

Talking about pet projects: investing in venture capital is supposed to be about diversification, not about bragging rights. Just saying. While this jab is not aimed at the young investors, those of you it is aimed at might recognize it.

Lots of models show you that if you start investing early, it pays off big time, as compounding works in your favor. But that doesn’t mean you should invest in something stupid just for the sake of being invested. And looked at differently, back to the college graduate with $50,000 income / $5,000 in savings: in a world where the 10-year government bond trades at 2.162% (the yield as I write this), the $50,000 in income corresponds to a $2,312,673 bond (the annual payment from such bond is $50k). Looked at it from that perspective, your $5,000 in actual savings represents only 0.22% of your portfolio. It means, you will be all right if your first investment doesn’t pay off. It is okay to learn (read: make mistakes). But it’s also okay to be on the sidelines. The advantage of having your capital at risk, however, is that you are more likely to take an interest, that is, being in the trenches provides experience and perspective.

Now what about the stock market? For those who have followed me, I don’t like current valuations. I don’t like the lack of market breadth. Indeed, my personal investments have been geared towards benefiting from a risk off environment while being out of most stocks. I like gold (again, none of this is investment advice). Now, any “normal” person would say, who cares, you are trying to promote long-term investments and especially if you’re young, the stock market has shown to be a good place to be over the long-term. Maybe, but I cannot in good consciousness recommend to anyone to plug money into the stock market at this stage. Sure, reference the example above, at 0.22% of one’s investment allocation, it may be cheap learning.

Indeed, if someone says I’ll give a certain percentage to a robo adviser, I’m not going to object to it, even in the current environment: one good thing robo advisers do well is to rebalance a portfolio, a key step many investors forget. I have long preached that ‘doubling down’ in late 2008 was irresponsible for those who had not taken chips off the table during the good times (if you lose half your net worth, it is irresponsible to put more capital at risk), but may be quite appropriate for someone steadily investing and rebalancing their portfolio.

The reason I have shifted heavily into currency investments over the years is not that I’m in love with the euro (despite what some cynics say!), but that the currency market provides an avenue to generate uncorrelated returns. In an era where central banks have elevated asset prices into what might be bubble territory, and fostered capital misallocation, investors need new tools to have a robust portfolio for what may lie ahead. That doesn’t mean that college kids or sixty year olds should suddenly become currency traders, but it suggests to me we need to think beyond the traditional asset allocation. Gold comes up many times in these discussions; it’s not that gold is so much “better” than many other investments, but it’s much easier to grasp the potential diversification benefits and understand the risks of gold than of long/short equity or long/short currency strategy. However, in the same spirit of diversification, an investor should consider gold instead of or in addition to an investment in something completely different, say a storage business (I’m tempted; I have friends who have done it – tenants don’t complain and you can sell their stuff if the monthly lease payment doesn’t come). Did I mention my wife is developing a vineyard?

My goal here was not to get your portfolio into perfect shape, but to get you out of your comfort zone, to get you thinking. Let me know whether I succeeded. On the topic of gold, we have a webinar on Thursday, September 21 (click to register). If you believe this analysis might be of value to your friends, please share it with them. Follow me on LinkedIn or Twitter

Axel Merk

Manager of the Merk Hard, Asian and Absolute Return Currency Funds, www.merkfunds.com

Rick Reece is a Financial Analyst at Merk Investments and a member of the portfolio management

Axel Merk, President & CIO of Merk Investments, LLC, is an expert on hard money, macro trends and international investing. He is considered an authority on currencies. Axel Merk wrote the book on Sustainable Wealth; order your copy today.

The Merk Absolute Return Currency Fund seeks to generate positive absolute returns by investing in currencies. The Fund is a pure-play on currencies, aiming to profit regardless of the direction of the U.S. dollar or traditional asset classes.

The Merk Asian Currency Fund seeks to profit from a rise in Asian currencies versus the U.S. dollar. The Fund typically invests in a basket of Asian currencies that may include, but are not limited to, the currencies of China, Hong Kong, Japan, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.

The Merk Hard Currency Fund seeks to profit from a rise in hard currencies versus the U.S. dollar. Hard currencies are currencies backed by sound monetary policy; sound monetary policy focuses on price stability.

The Funds may be appropriate for you if you are pursuing a long-term goal with a currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market. For more information on the Funds and to download a prospectus, please visit www.merkfunds.com.

Investors should consider the investment objectives, risks and charges and expenses of the Merk Funds carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Funds' website at www.merkfunds.com or calling 866-MERK FUND. Please read the prospectus carefully before you invest.

The Funds primarily invest in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Funds own and the price of the Funds' shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. The Funds are subject to interest rate risk which is the risk that debt securities in the Funds' portfolio will decline in value because of increases in market interest rates. The Funds may also invest in derivative securities which can be volatile and involve various types and degrees of risk. As a non-diversified fund, the Merk Hard Currency Fund will be subject to more investment risk and potential for volatility than a diversified fund because its portfolio may, at times, focus on a limited number of issuers. For a more complete discussion of these and other Fund risks please refer to the Funds' prospectuses.

This report was prepared by Merk Investments LLC, and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute investment advice. Foreside Fund Services, LLC, distributor.

Axel Merk Archive

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


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules