Financial Abundance

Being in the financial services industry, I am often asked for my financial forecast. Since my crystal ball is no better than yours, I never predict what the future may hold. However, by paying attention to macro-economic conditions, we can make informed investment decisions that will likely increase our total returns.

For 2009, there are some financial indicators that should be considered when planning investment strategies. Let’s examine how these indicators can be used to increase investment returns in 2009 and beyond.

When evaluating your investment portfolio, always consider economic and market conditions as part of your portfolio allocation process. In late 2007, seeing that future economic conditions were weak and the stock market was at an all time high, I decided to dramatically lower my clients equity (stock) positions and add a small position in gold. This decision has lead to significantly lower losses for my clients in 2008 than if they had stayed with their normal equity allocations.

In 2009, we know that economic conditions remain very weak and will likely show little improvement in the short term. We also know that the federal government is going to provide a huge economic “stimulus” program that will likely take the 2009 and 2010 budget deficits to a trillion dollars or more. Finally, we know that decreasing housing and oil prices have created a deflationary environment.

With this information, it appears that stocks will have a more negative than positive bias in the next few months. Therefore, I am not adding to my client’s equity holdings at this point. When market volatility decreases and company profits stabilize, I will slowly bring equity positions back to normal allocations.

Even though deflationary pressures will likely remain for a while, the Fed and the Treasury are determined to print as much money as necessary to reduce deflationary pressures. As the economy recovers, the additional dollars in circulation, combined with our exploding federal deficit, will provide an ideal environment for inflation.

If high inflation occurs, Treasury Inflation Protected Securities (TIPS) will be an excellent investment. 10 year TIPS are currently priced to reflect inflation of less than .5% per year, over the next ten years. If inflation exceeds this amount, TIPS will provide both inflation adjusted yields and an increase in price.

Another likely beneficiary of future inflation is gold. Gold can also be considered a “safe haven,” if economic conditions further deteriorate or the dollar weakens.  If you decide to add gold to your investments, keep your gold position to no more than 5% -10% of your portfolio.  As gold will likely fluctuate in price over the next few months, if you are patient, you may be able to buy it when the price of an ounce of gold is in the low $700s. The easiest way to own gold is through the SPDR Gold Shares Exchange Traded Fund (GLD).

There are many investment philosophies to choose from. After trying several different investment approaches over the past 25 years, I have found that following macro economic data can provide good insight on asset allocations and investments. Combining this information with a simple, diversified, index fund based portfolio has provided for excellent investment returns over the past seven years.