Starting Your Investment Plan

This post has been elevated from the enrolled forums section. It is the introductory piece of a series on 'How to construct an Investment Portfolio' authored by user Travlin (enrolled members can access the entire series here).

Investment planning should be kept as simple as possible while still meeting your needs. As a self-directed investor, it is important to me to evaluate the situation, define what I want to accomplish, and decide how to get there. I find that putting this in writing helps me organize and clarify my thoughts into a useful assessment. This does not have to follow a rigid format as long as it is coherent. From this I can begin to structure the portfolio I need, but that is a separate topic.

Below is my latest assessment. It has three parts

Situation Analysis
Investment Needs
Investment Strategy

This is offered as a model to show you one way it can be done. There are many others. Feel free to use this model as is, or revise it to suit your views and circumstances. There are many books on investment planning that you can easily find by searching Google or Amazon, but I have no recommendations, as I just wing it, myself.

If you are using a professional investment advisor, you can give them your assessment to read and save a lot of effort trying to explain your views. This will also save time by answering many of the questions they would have had to ask you anyway. It is much more productive for them to work with someone who is not starting from zero. Your investment needs and strategy should be negotiable, as you are paying for their expertise. But if you can’t find common ground on your situation analysis, then their views on needs and strategy will not be suitable for you.

My assessment reflects views that Chris and others have expressed often, and they have my sincere gratitude. There is not a lot of original content here. I have just restated those views in a clear and concise document for easy reference. It is helpful to review your assessment periodically and revise as needed.

I had to retire early, but we have a comfortable income. My wife continues to work. Our kids are nearly grown. Our physical preparations are progressing. We have a good cash reserve and have allocated much of our portfolio to precious metals. Our primary objective is to preserve the value of the assets that we have accumulated from a lifetime of work. They cannot be replaced.

Your investment needs and investment strategy must reflect your circumstances and risk tolerance. Your objectives might be to set a realistic budget, so that you can save money to build a cash reserve and also buy silver coins. The important thing is to apply disciplined thought to the matter and reach conclusions. This model can help you in that process. In our current situation, diverse circumstances can share a lot of common ground.

I am well aware that financial issues are just some of the bigger problems we face. But being able to support ourselves in uncertain times is critical, and becomes more so as we get older and lose the energy and stamina of youth. We are much better able to help others if we can meet our own needs and not expect anyone else to take care of us.

The key to good investing is to take emotions out of your decisions. It usually takes years of investment experience to master those emotions, and during periods of turmoil they will reassert themselves. Having a written plan – one that was created when you were calm, rational, and objective – will help you keep a cool head and guide your actions for best results.

I hope you find this helpful.

Travlin

Asset protection in a deteriorating world:

1) Situation analysis

We are experiencing an unprecedented world-wide economic crisis, comparable to a disguised Great Depression, but potentially even larger in magnitude and scope.

For thirty years the major developed nations – the USA, the European Union, and Japan – spent money and assumed obligations faster than real incomes grew. This was masked by increasing debts to unprecedented levels. Those debts are now so large they can never be repaid. The financial and economic problems since 2007 are a result of this situation.

In an attempt to maintain the illusion, and grow out of the problem, the Federal Reserve (Fed) created over $2 trillion dollars out of thin air. It has suppressed interest rates to unprecedented lows, and committed to hold them there for two more years. It used the $600 billion of QE2 to buy US treasuries, bought large quantities before, and will continue to do so. Without the Fed the US Government (USG) can no longer find enough buyers for its debt at interest rates it can afford.

The official USG debt is currently over $14.7 trillion dollars, which is over 98% of our GDP. Credible estimates of all obligations of the USG range from $70 – $200 trillion. USG spending is about 25% of GDP. The current annual deficit is around 10% of GDP. Without that deficit spending our GDP would shrink 10%, which is a benchmark of a depression. Today 43% of all USG spending is borrowed.

The recent agreement raising the US debt limit is a complete farce. At best it will cut spending by $2.4 trillion over ten years, which averages only $240 billion per year. Our current deficit for this year alone is over $1.3 trillion. The cuts for 2012 are only $25 billion with bigger amounts pushed off to the future. These are not real cuts based on current spending. They are merely decreases in the projected growth of future budgets.

Policymakers are clearly incapable of dealing effectively with the fundamental issues above.

There is only one way to avoid outright default. USG debts will be paid because the Fed will just print the money. The results will be a severe devaluation of the US dollar, compared to present purchasing power. This was evident with the initiation of QE2 and the resulting currency war. All major currencies are now seeking to devalue, to avoid pricing their goods out of the market in world trade. This is literally a race to the bottom. The US dollar is starting to lose its status as the world’s reserve currency, but is temporarily the least ugly nag at the glue factory.

The probable results of these issues will be financial and economic turmoil that increases in frequency and severity. The traditional rules of investing no longer work. Preserving the value of assets will become increasingly difficult, and requires an understanding of the macro forces that are reshaping our world. There are no conservative financial investments in the traditional sense that will preserve value. Our assessments of risk and reward must be adjusted accordingly. This situation forces us to carefully consider unconventional strategies.

There are strong data to support the argument that vital global resources are approaching a tipping point. The most important of these is Peak Oil. Official sources are beginning to confirm that we appear to be on an irrevocable course of annually diminishing oil supplies. This would wreak havoc financially and economically, and severely impair the ability of industrial nations to support their populations at anything like current levels of consumption. Peak oil would finish off any chance of an economic recovery. Some official government reports now project oil shortages as early as 2012. The timing of peak oil may be uncertain, but sustained financial crisis is a reality today.

2) Investment needs

“The next 20 years will be completely different from the last 20 years” – Chris Martenson

We must be realistic about the situation we face and prepared to do unconventional things in response. If we follow conventional wisdom we could lose everything we have accumulated over our lifetimes.

Primary objective – Preservation of asset values. Under present conditions, this most conservative of objectives requires consideration of ideas that would seem risky in ordinary times. Cash is a deteriorating asset that could lose value dramatically.
Secondary objective – Increase investment gains and assets while it is still possible. This is needed to offset declines in assets that will probably be unavoidable, even with the best protection we can devise today.

Potential financial threats

Pension reduction or loss
Social Security reduction or loss
Confiscation or punitive taxation of assets – 401k, IRA, pension, gold, silver
Currency controls to prevent money leaving the US or returning (the recent HIRE act)
Currency devaluation becoming more severe
High inflation
A global credit crisis that could cause unprecedented disruptions in the banking system and securities markets
Hyperinflation and currency collapse

3) Investment strategy

Themes

The world’s financial situation grows increasingly precarious, and economic and political institutions less effective and trustworthy.
World oil production has been at a plateau since 2005 despite increasing demand lead by China and India. There is good evidence the future will see steadily declining supply. This would have severe effects on the global economy, personal consumption, and political affairs.
The quality and quantity of basic resources are under increasing strain due to growing world population and increasing wealth in developing countries.
As a class, financial investments like stocks and bonds require sustained economic growth to do well, but this is unlikely to happen.
Hard assets are likely to see a long term rise in value.

Particular concerns

We want diversification among currencies and countries. We are positioned to move selected funds out of the US, and US dollars, very quickly.
We are open to limited exposure in US investments, but favor having the majority elsewhere, particularly Canada.
We are open to carefully selected stocks, but not bonds as interest rates can only rise.
We think world stock markets are likely to fall drastically, driven by a credit crisis, and we are willing to wait for a good buying opportunity.

Strategy

In my judgment the best prospects for preserving value are hard assets – productive land, gold, and silver. These core holdings will form the basis of the portfolio.

Productive land is highly illiquid, and generates low income compared to capital, but it is the ultimate store of value. They are not making any more of it and everyone has to eat. The recent run up in farm prices was driven by the ethanol boom and financial speculation. Nearly 40% of US corn is now burned as fuel. The recent cutback in federal ethanol subsidies could bring farm prices down, but wealthy people are interested in this market as a safe haven so they may not move much.
Gold is an alternate currency. As world paper currencies devalue together the relative differences among them may not be large, but the absolute decline is visible compared to hard goods, like commodities and consumer purchases. I expect gold prices to continue to increase over the long term as awareness of currency problems grows, and people make a flight to safety. Demand should remain strong as long as the Fed continues to create large amounts of money out of thin air, and interest rates are held artificially low. Gold is not a sure thing, but the fundamentals may make it the least unsure thing.
Silver has some appeal as a currency but less than gold. However, at about $40 per ounce it is much more affordable for purchase, and for over a year demand for coins has been straining supply. The real story is that silver has a vital role in industry, and for years has been consumed faster than it is produced. It is primarily produced as a by product of mining other metals, so no significant supply increase is likely.

Two other asset classes deserve consideration for diversification.

Commodities are hard assets and could do well long term due to excessive printing of fiat currencies, and rising demand from the BRICs (Brazil, Russia, India, and China), while resources diminish. With the exception of precious metals, it is generally not practical to hold commodities directly. The futures markets for commodities are risky and require expertise. Research is needed to identify investment vehicles that allow indirect participation in this market with acceptable risk.
Stocks in general will fair poorly in a constrained world economy. With very careful selection it may be possible to indentify companies in industries that are strategically positioned to do relatively well in a world of declining energy. Examples include oil exploration and development, natural gas production, coal production, and manufactures of solar power and wind power equipment. Railroads are the most fuel efficient land transportation and vital to commerce. These ideas need to be researched to select specific stocks now, which could be purchased later when market conditions are favorable. Ideal timing would be after a major stock market rout, but before peak oil is recognized. Averaging purchases over time should also be considered.

– Travlin

This What Should I Do? blog series is intended to surface knowledge and perspective useful to preparing for a future defined by Peak Oil. The content is written by PeakProsperity.com readers and is based in their own experiences in putting into practice many of the ideas exchanged on this site. If there are topics you'd like to see featured here, or if you have interest in contributing a post in a relevant area of your expertise, please indicate so in our What Should I Do? series feedback forum.

If you have not yet seen the other articles in this series, you can find them here:

This series is a companion to this site's free What Should I Do? Guide, which provides guidance from Chris and the PeakProsperity.com staff on specific strategies, products, and services that individuals should consider in their preparations.

Preparedness