It wasn’t too long ago that global investors were sending stock prices lower based on debt concerns in Europe. This very real issue hasn’t gone away; it’s only begun to be addressed by politicians, and there’s a lot more work to do. Now the issue is affecting Ireland, and it’s my strong feeling that we cannot ignore this risk to your investments.
If the commodity price cycle is going to be the big story this decade, then debt/currency issues will be the biggest threat to global financial stability. It’s a boring subject for most people, but sovereign debt (including the U.S.) has the very real potential to create significant currency instability going forward. Major currency changes are already afloat. In the past, big currency fluctuations have proven throughout history to wreak havoc on investor pocketbooks.
It was only back in August that sentiment among equity investors was so bad that not even the best corporate event could shake institutions into buying shares. Now, everything seems rosy again thanks to our good friends in the money printing business. This is a false sense of long-term security.
I don’t want to be in the business of predicting the stock market as a whole. The action is the action. There’s no right value for an equity security or an entire market, so why go around worrying about it. All the numbers do is reflect the perception of value at a given point in time. Being one who’s usually fully invested, I’ve ridden the same rollercoaster that most people have. But, I’ve also learned over the years that investment risk is just as important as the potential return on your investments. In this market, a good dose of protection is a worthy strategy.
Everyone in the equity speculation business has a short memory, with both winners and losers. Once in a while, a big risk can sit stewing and then come back to bite everyone in the “you-know-where.” I think that big risk is sovereign debt and it has the potential to break the euro in two and create a serious tidal wave of negative sentiment in all capital markets. It’s something that equity speculators need to keep in the back of their minds if they’re thinking about jumping on the current bandwagon in stocks.
It isn’t fun thinking about risk. It’s way more fun to think about potential return. But, with the right assets in your portfolio, you can mitigate risk to a significant degree. From my perspective, we’re in a bull market for commodities, not equities. I can’t predict where the broader market is going to go over the next couple of years, but I do know that I want to hedge my bets and own real things like gold and fertilizer. It’s a back-to-basics investment strategy that reflects the fundamentals in this new age of austerity.