The global economy is undergoing a vast transformation. Investors should transform their thinking too.
The expansion of the credit market is over, the stock market is collapsing, home prices continue to fall and the dollar is losing its prominence as the world's primary currency. In other words, the financial landscape as you know it is undergoing a vast transformation. The good news: from crisis rises opportunity.
Is it possible to preserve and grow your wealth during times like these? How can you position yourself to capitalize on the opportunities of tomorrow? In this short article I will summarize, in very simple terms, a much more in-depth article I wrote in July 2008 called The Great Transformation
. You can read the full article at www.scminvest.com/tgt
The great transformation
I do a lot of reading and research about the financial markets. It's my job, but it is also my passion and my favorite hobby. If I were to retire tomorrow, I'd wake up and do the same things I'm doing today; managing my own personal assets and helping those investors who want to learn more about the financial markets.
The issues surrounding today's financial markets are more complex than ever, so I'm going to use broad strokes to paint you a picture. If you want to dig deeper, there's no shortage of material in bookstores. Just be careful of what you read. Feel free to contact me using the article forum for book recommendations.
Mohamed El-Erian, a former manager of Harvard's endowment fund, is Co-CEO of PIMCO, the world's largest bond investor. Today he oversees about $830 billion. In his recent book, When Markets Collide
, El-Erian explains that we are experiencing drastic changes in the operation and structure of global markets. He says that investors must be aware of these changes if they want to be successful. His book has a few central themes:
- Americans have been living beyond their means for some time, supported largely by foreign investors who hold very large sums of U.S. bonds. Until now, the negative effects of U.S. indebtedness have been delayed by easy credit.
- U.S. bonds, at some point, will be less attractive and credit in the U.S. will become largely unaffordable.
- The market forces of emerging foreign economies will lead to inflationary pressure here in the U.S. and higher commodity prices worldwide.
- Investing in U.S. equities (stocks) is becoming less appealing and risks are increasing.
El-Erian points to these and other factors as the primary drivers of the current global financial crisis and transformation. The financial mess we are in today will require a large and costly cleanup. El-Elrian refers to this as "our financial plumbing problems," which he says needs to be retooled. "The old pipes are simply incapable of handling the flow of both the new and old transactions. Traditional instruments are becoming less potent and are overwhelmingly complex," El-Elrian says.
The new rules of investing
We believe that the rules of investing have changed. Traditional investment strategies, such as buy-and-hold, are too risky. The investment concepts being promoted by the mainstream financial services industry are outdated. Traditional asset allocation does not provide enough potential return to justify the risks.
Investors tend to underestimate extreme events and tend toward passivity and procrastination.
Investors repeatedly chase historic returns with too little regard for risk and probabilities around future returns. The mistake of conventional investing is that it is designed to capture returns from a stable and expanding global economy. The fact is, our financial structures are fragile and the global economies are fluid. Booms and busts are a fact of life and must be planned for.
Investors looking to manage risk need an investment plan that can adapt to change. To be a successful investor, you don't need to predict what's going to happen, but you do need to recognize and react
to changing conditions. The great economist John Maynard Keynes said, "The difficulty lies, not in the new ideas, but in escaping from the old ones." Actively seeking investment opportunities is not a characteristic of traditional, buy-and-hold investing, but it is a message we've been preaching for years.
World events and financial markets are not predictable. No one knows what the next 10 years will bring, but it is unlikely that they will look anything like the past decade. The next 10 years will bring opportunities and challenges that we cannot imagine today.
Today, more than ever, I believe that investors need the help of a professional investment advisor.
Take a good, hard look at your financial situation. Be sure that you and your advisor understand and are planning for the uncertainties and opportunities that lie ahead. Working together, you can secure your financial future.
*For further information, or to contact this author, please leave a comment and your e-mail address in the forum below.