In an environment of low interest rates, slowing global growth, uncertainty about the future prospects of many industries, and rapid technological change, investing is certainly complicated and has many variables to consider.
Given the many questions about the business, political, and social environment, how should one go about allocating capital today with the objective of having more money in the future?
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First, take account of your specific financial situation. If you are mature and cannot afford losses because you are living off your investment income, you probably should stay risk averse and liquid, with cash, high grade bonds like municipals, treasuries and A and BBB+ rated corporates.
In my view, the caveat of owning bonds is that if either the interest rate or inflation risk start to tick up, the loss of principal and purchasing power can more than offset any income generated from these assets.
If your financial situation is more settled and you are more concerned with generating wealth, taking more risk with equities and alternative assets might fit you better.
Alternative assets like commodities, real estate, private equity, hedge funds, and venture capital all have their own risks to consider as well.
With asset groups other than commodities, many investments are illiquid so you have to be prepared to invest for a long duration.
As my preference is always equities, if you do not believe in active asset management, owning indexes and ETF’s with low fees is now considered the most reasonable approach if you want exposure to stocks.
With the abundance of exchange traded funds targeting specific markets or industry groups, make sure you do your homework about what the underlying assets are in each fund or index.
If you want to dip your toe into choosing and owning individual stocks, I think it would be wise to consider energy as an area to research for potential ownership.
Why energy? It is a group which is necessary and you can count on for decades into the future.
Energy is very broad with plenty of variability in the areas to consider. If you are looking for stable assets, consider the large integrated oil companies such as Exxon (XOM), Chevron (CVX), Shell (RYDAF), BP, Total (TOT). They provide income with good dividend yields (2-5% or more).
The question is will the yields be sustainable in the future if oil prices do not revert back to a normal level of 60$-70$ per barrel? You can assume they will be cut some and factor that into your decision making process.
It will totally be company-specific based on the cash flow decisions of the individual managements about how much they want to reinvest in new or existing projects as opposed to maintaining a high-dividend payout.
If they are cut, it may be the case they are only reduced for a few years and then revert back to the existing level.
If you lean towards taking more risk, smaller exploration and production companies offer the most upside but you really have to do your homework in terms of the condition of the balance sheet and where their existing production base is concentrated.
The companies which have the lowest cost of production tend to be located in the Permian Basin, but each entity has their own specific situation which has to be looked at.
They also have valuations in the stratosphere so you are really betting on the adoption of these technologies reaching critical mass in the near future, which is not exactly a sure thing.
Another area to consider for future investment is health care. A strategy which has been very successful is to buy beaten down pharmaceutical manufacturers whenever possible.
If an enterprising investor had decided to buy companies like Pfizer (PFE), Merck (MRK), Bristol Myers (BMY), Amgen (AMGN), Biogen (BIIB), Eli Lilly (LLY), Novartis (NVS), Johnson & Johnson (JNJ), as specific examples, every time they were at a five or ten year low. The results would have been excellent, in my opinion, especially if you are looking at a long-term time horizon (more than 3-5 years).
Yes, I think that investing today is a challenge, as the choice between protecting your capital and investing for the future is always present. But with plenty of research and patience, I think you can find a path forward which suits your objectives.
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