Two Ways to Counter The Government's Financial Repression

06/10/2011 0 comments

PIMCO was the first one who coined 'new normal' for the coming decades. They continue to fine tune their theory as time goes. In a recent report, PIMCO's CEO Mohamed El-Erian pointed out an ongoing financial repression the U.S. policy makers have adopted. The key points are

  • "...excess liabilities have simply been shifted around the system, and importantly to public balance sheets and taxpayers."
  • Higher inflation going forward
  • Currency depression
  • Uneven growth potential with developed countries slowly healing themselves while emerging markets commanding higher growth (not without much higher inflation risk)
  • Both U.S. stocks and treasury bonds are not attractive at this moment: according to PIMCO's Bill Gross who stated at the Morningstar Investment Conference on Wednesday: "Stocks have come to the end of a "wonderful journey," and are now on their own, like "a baby bird just released from the nest." The journey Gross spoke of is the multi-decade decline in real interest rates, which have fueled bull markets across "risk assets," especially in equities and bonds.See here for more detail.

In a word, the financial repression penalizes savers and transfers wealth from a group to others.

Here are two ways one can adopt to counter what the governments are doing for you:

  1. Diversify: your investment plan should include global opportunities, in both risk and fixed income assets. That means your plan's candidate investment choices should include developed country stocks such as U.S. stocks (SPY), foreign stocks (EFA) and emerging market stocks (EEM). You should also include non traditional assets like commodities (DBC) and Real Estate Investment Trusts (REITs) (IYR) (VNQ). On fixed income side, include global and emerging market bond funds (BWX) (EMB)
  2. Be Nimble, Go Tactical: With uneven and bumpy road ahead, you have to drive adeptly. Re-balance regularly. Better fund selection or even changing asset mixes dynamically.

 

Check out TD Ameritrade Commission Free ETFs plan that consists of 101 ETFs. They cover 6 major asset classes and 44 minor asset classes. The major asset classes it covers are Emerging Market Equity, Foreign Equity, Fixed Income, US Equity, Commodity and REITs.

Here is the model portfolio performance comparison:

Portfolio Performance Comparison

Portfolio/Fund Name1Yr AR1Yr Sharpe3Yr AR3Yr Sharpe5Yr AR5Yr Sharpe
VFINX 20% 128% 0% -0% 2% 4%
VBINX 15% 164% 4% 20% 5% 23%
TD Ameritrade Commission Free ETFs Tactical Asset Allocation Moderate 12% 99% 8% 54% 15% 94%
TD Ameritrade Commission Free ETFs Strategic Asset Allocation Moderate 14% 178% -1% -8% 6% 26%

 

Symbols: SPY, EFA, EEM, IYR, DBC, AGG, TLT, Portfolio Strategies

Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.



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