Stocks or bonds?

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Finanza Operativa di Finanza Operativa 24 Marzo 2017 | 14:30

A cura di Walter Snyder, Swiss Financial Consulting

In the good old days investors could keep their portfolios balanced with 60% in bonds and 40% in stocks. Government bonds were practically risk free and produced reasonable gains while blue chip stocks were dependable dividend producers. Nowadays investors have difficult decisions to make because of the increased sovereign debt resulting from the 2008 crisis and unorthodox central bank policy.

This Newsletter has already examined the sorry state of the bond market and the extremely low interest rates that make bonds uninteresting for investors looking for yield. The Fed, ECB and BoJ have eliminated price discovery in the bond markets. Now that the Fed has started raising interest rates, one can expect a bear bond market and tight credit in the US. One can reckon with two or three more interest rate hikes on the part of the Fed this year alone. Bond fund asset managers are going to have a difficult time trying to achieve better than average performance. Investors cannot expect much from putting their money into a bond fund since active ETF bond funds that anticipate rising interest rates have high fees.

The situation is even more fraught with risk when it comes to stocks. US equities are overpriced and due for a correction. This was the subject of an earlier Newsletter. The reason for this is that investors are moving funds from bonds to stocks, and companies are still buying back their own shares, thereby creating higher P/E ratios without increasing profits while at the same time diverting funds from research, development and capital expenditure. This means that the US has been misallocating capital on a large scale for the past few years.

The time to buy stocks was in 2009 when prices were low after the crisis of 2008. Purchasing US equities at the present time is expensive and extremely risky and is also not interesting as far as dividends are concerned. It is much more intelligent to look for German and Swiss companies that pay regular dividends on their stocks than to speculate that Wall Street quotations will go higher and higher.

Several market observers have noted that the present situation in US equity markets is even more marked than just before the Dot Com disaster of 2000 and the implosion of 2008. Investors are also faced with high prices in real estate because of central bank low interest rate policies. What is cheap at the moment, thanks again to the machinations of the central bankers, is the investor`s ultimate hedge, namely, the yellow metal, gold. Given that, holding 10% of one`s portfolio in physical gold, not fiat paper gold, could be a good hedge in a high-risk environment.

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