Oh . . . decisions, decisions, decisions! As an investor, you have a multitude of options from which to choose on where you may deploy your capital. Should you be in Real Estate, Paper/Stocks, or Commodities? And when is the right time to invest? What are the tax implications? What tactic should you incorporate into your strategy to get your portfolio up and running?
Full Disclosure: I do not like to lose on any investment I make, nor have I met anyone that does! Had to get that out of the way. My disclaimer should not be misconstrued into believing that I am risk averse. Risk averse is when an investor is not willing to invest due to the volatility, inexperience, or fear of loss in an investment. Notice I did not use the word risk in my definition. Let’s break this down a little further shall we?
Remember: Risk is not knowing something, doing it, and expecting great results. An investment may have a historical track record of violently going up and down, but that does not suffice for being called risky. That is the definition of volatility. Within volatility, great gains can be made and lost. Within my portfolio, I recognize the speculative and volatile nature involved in my holdings. My courage and conviction are from my study and understanding Cycles. Cycles provide an investor the opportunity to discern what is under and over valued. When volatility lowers the price of a position I hold or want to hold for no fundamental reason other than the bipolar antics of Mr. Market that is known as a blessing.
Let’s consider that we have 3 baskets from which to place your capital goods. The 3 baskets consist of Real Estate, Paper/Stocks, and Commodities. But how does one determine which of the 3 is under and over valued? Historically, Real Estate and Paper/Stocks tend to follow the same pattern in valuation juxtapose to Commodities. So you may want to consider being in 2 out of 3 for diversification. But aren’t mutual funds diversified? Negative, mutual funds fall under 1 out of the 3 baskets which are paper/stocks. Diversification is being in 2 or 3 out of the 3.
The following is not an absolute, but rather, a good measure of how to determine where to be and when to be (valuation) in your investments. May I submit to you the Dow/Gold ratio? I learned this from reading the Mike Maloney’s book entitled, ‘Guide to Investing in Gold and Silver’. Example, if you take the price of gold $1,226 and the points of the Dow 18,214.74 and divide them you will get 14.86. Therefore:
If the answer is <4 Paper/Stocks & or Real Estate are undervalued.
If the answer is between 6-7 then all three are fairly equal in value.
If the answer is >7 Commodities are undervalued.
Based on the answer being 14.86,where should an investor should be exposing their investment portfolio? I would first encourage you to set a goal on acquiring physical precious metals 1 of 3, then pursuing the best of the best in Natural Resources via stocks/paper 2 of 3. *Keep in mind owning bullion does not equal owning a mining stock*. Finally, investors should seek the merits of procuring cash flowing real estate to complete their portfolio 3 of 3.
Proven & Probable
The featured image was by: Mark Herpel