In a brand new report, Dan Denning reveals how you can:
Retire Now and Still Grow Your Stock Portfolio
Take These Three Steps Before
The Next Financial Crisis Hits...
Hi, I'm Dan Denning.
AWG is the place where I take the ideas in the Daily Reckoning and turn them into actual investment strategies with specific investment recommendations. Over the last five years, I've used my position to warn investors like you about threats to their wealth.
Perhaps my most important call was in 2007. In September 2007 I told readers to sell EVERY ONE of the American stocks I'd recommended to them. I knew it would scare some investors and alienate others.
Some of those stocks were up many hundreds of percent and represented years of gains from the commodity bull market.
But having covered the story since 2004, I knew the American subprime lending boom was about to blow up in spectacular fashion. Here's what you would have read if you were one of my readers five years ago:
It's a strange time in the markets right now. Everything appears normal. But that is not the case at all. Conditions could not be more abnormal or dangerous for individual investors. So what do we do?"I was clear and unequivocal in my advice:
We are at the end of the longest, largest and most irresponsible credit bubble in history.That's why I'm putting sell recommendations on the all the North American and U.S. stocks. It's time to say goodbye to them. The fallout from the credit bubble could wipe out many years of gains in solid resource stocks.The only way to prevent that is to take profits now.Over the years I've met many Australian readers who told me that advice saved them big losses. I've continued ringing the alarm bells since I took over AWG two years ago. In 2010, I warned that the Global Financial Crisis was fast becoming a sovereign debt crisis and that Australian stocks would be affected. In May of that year I wrote the following:
The world's financial system is collateralised by a mountain of debt that threatens to come tumbling down. The destruction of that collateral should and probably will mean lower stock, bond, commodity and house prices...The Euro crisis is far from over. Europe's banks are stuffed with the debts of Europe's governments. One man's liabilities are another man's assets. This situation is not sustainable...This is why the investment strategy of this letter is risk averse and biased toward tangible assets. Stocks – as I'll show in a moment – are enormously vulnerable to deleveraging. That is, if banks in Europe and elsewhere are forced to sell assets to raise capital because they are losing money on government bonds, they're going to sell stocks. And if last time (2008) was any indication, that includes Australian stocks.Let me be clear: the risk of a big fall in stocks from an "unexpected event" in Europe is very much alive.
Aussie stocks have managed to tread water since May of 2010. This is thanks to government stimulus and central bank "quantitative easing." But I want to warn you that the situation is not sustainable indefinitely. Even the International Monetary Fund (IMF) agrees with me.
In mid 2012 the IMF warned of major deleveraging in the European banking sector. In a new report it writes that European banks could be forced to shrink their balance sheets by $2.6 trillion over the next 18 months. Banks would be forced to sell securities and non-core assets to raise cash as they write-down debts, according to the IMF.
This has not happened yet.
For that, you should be grateful.
It means you still have time to take action before events over take you. I'll show you what you can do in just a moment. But let me assure you that I haven't just been shouting gloom and doom from the rooftops either.
Throughout the journey I've been recommending ways for you to secure your wealth from external threats, grow it with dividends from good businesses, and take the odd punt on shares with something extraordinary going for them.
From top to bottom, it's a real wealth gameplan you can use to help you map your own financial course.
Today I want to issue another warning and alert you to another opportunity.
If you heed the warning, I believe it could save you the needless loss of money from a volatile stock market. And if the opportunity I'm going to share with you pans out, you stand a good chance to come out of 2012 with at least one triple-digit winning share (one of which is selling for under 60 cents as I write).
What's more, taking the steps I outline below should greatly relieve the stress that comes with being an investor today.
Like all investors, you are working toward a personal financial goal. My aim is to help you reach that goal so that you can enjoy the retirement you've worked hard for – without the anxiety and fear that have dominated the last three years.
Of course I can't guarantee that my ideas will fit perfectly with your situation. But the least I can do is share them with you. Then you can decide for yourself.
But first, let me share another important idea with you. It comes from one of my favorite authors. He wrote during the 1920s and '30s, a time of great social and financial upheaval. His essay The Crack Up, written in 1936, contains an idea that could be useful to you today, 76 years later.
The Test of a First Rate Intelligence
The 20th century American novelist F. Scott Fitzgerald once wrote that, "The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function. One should, for example, be able to see that things are hopeless and yet be determined to make them otherwise."
That's great advice for investors in 2012. The financial world has never been more confusing or uncertain. It seems hopeless. Yet you still have to do something with your money, don't you?
One opposing idea dominating financial markets is that we're on the edge of another major crisis. That crisis – led, perhaps, by a European government defaulting on its debt – could cause stock markets to plunge as they did in 2008 and 2009. It could also lead to political and social unrest, neither of which is especially good for stock prices.
On the other hand, the authorities who run the world's financial system constantly tell you that things are getting better. In New York, the Dow Jones Industrials have finally traded above 13,000 again – a level not seen since early May of 2008. Surely this is a sign that the worse is behind us, isn't it?
Who is right?
Is it the optimists or the pessimists?
The bulls or the bears?
Should you be a buyer or a seller?
Before you answer that, I'd like you look at the chart below. It shows you the daily performance of the All Ordinaries between April of 2006 and April of 2012.
It may be a bit different at the time you're reading this. But I want you to look at the overall trend from the last seven years. This gives you a more accurate picture of just what's happening in Australia. Look at it closely. What do you see?
Seven Years of Trading on the All Ordinaries
I'll tell you what I see.
I see an index that's just over 10% higher than it was in May of 2005, when it closed at 4009 (11.1% to be exact, at the time of writing). It's gone much higher (nearly 6,800 in October of 2008) and much lower (around 3100 in March of 2009).
But over the last seven years the index has averaged a 1.6% return each year.
No matter how you slice it, that kind of performance is going to be hard to retire on.
In fact, I'd suggest to you that counting on the share market to provide for your care-free retirement is an increasingly risky proposition.
As I'll show you in a moment, the next ten years are going to look nothing like the last ten years. Unless your portfolio is prepared for it ahead of time, you could be in trouble.
More to the point...
You can't afford another
seven years of poor returns
This is the warning I want to make loud and clear today.
Do not expect a return to "normal" (whatever that means).
Do not count on the stock market doing your work for you.
Any number of events could lead to another seven years of sideways returns in the market – or worse. These are the events you need to think about and prepare for today. I'll get back to them in a minute.
But first, have I drawn the right conclusion from that chart? Or am I exaggerating? Distorting the truth? Manipulating the data?
If an analyst from the financial industry looked at my chart I can almost guarantee you what he'd say.
He'd probably say that the chart isn't an accurate predictor of what you can expect from stocks over the long-term. He'd probably say that a chart can show anything you want it to show. It all depends on the start date you pick.
For example, if you go back ten years to April of 2002, you'll find the All Ordinaries trading at 3,329. That means the index is actually up 33% over a decade. That's 3.38% a year.
That's not great. But it's certainly not 1.6%, which doesn't even keep up with the official inflation rate. And considering it includes the worst financial crisis since the Great Depression, it's not terrible either.
If you go one step further and begin the chart in March of 2009 the results get ever better.
The All Ords are up 64% since closing as low as 2715 in March of 2003. A spokesman for the financial industry might likely say that the worst thing you can do – ever – is sell stocks. You have to buy them when things couldn't look any worse.
The financial industry is a big fan of "buy and hold" investing. They like to tell you that individual investors get emotional and do the wrong thing at the wrong time. Individual investors who try and time the market always buy at the top (like the Internet mania) and sell at the bottom (like in 2009).
The industry thinks you should leave the thinking to them, and let them make the important decisions for you.
I think no one is going to care about your money as much as you.
You should be actively involved and educating yourself about the world in order to better-informed financial decisions.
But it's probably not fair of me to put words in the mouth of the financial industry. So let me be clear about the point I want to make to you to today:
If you expect to make money in the stock market over the next ten years, you need to accept the idea that the index may go nowhere, but you can still make money.These ideas seem like they're opposed to each other.
But they aren't.
I believe you can grow your retirement portfolio without relying on a rising market.
I'll show you the three steps I believe you must take in order to make money from the stock market over the next ten years, even as the index goes nowhere. I've spent the last year writing about each step in detail for readers of AWG. My track record shows that it can work.
But it requires that you hold both opposing ideas in your mind at the same time and then take action. Even if the situation seems "hopeless," as Fitzgerald wrote, you still have to do something with your money.
My hope is that this three-step plan will help you protect your wealth from external threats, grow it with investments in good businesses that generate cash flow for their owners, and add to it considerably with a well-aimed intelligent speculation.
If I'm right, this three-pronged approach will help you make it through the next ten years with your money intact. As you get closer to your retirement goals, you need to protect what you have. But you can't be entirely passive. You have to choose your investments wisely.
Most importantly, I'm convinced you won't be able to do what you've done in the past. The world is changing too quickly. What worked in 2002 – buying resource stocks and cashing in on the China boom – is not going to work as well in 2012 when the China boom itself is in doubt. It will be harder than ever to make money in the market, but not impossible.
The events that will determine your share market returns for the next ten years
No one can predict the future.
I can't sit here and tell you exactly what's going to happen over the next ten years.
And I can't say for sure that the All Ordinaries won't be higher in ten years than it is today.
But I can guarantee you that the world is going to be dramatically different. If you're not thinking about that now, your investments are going to suffer.
Look, odds are if you're reading this then you're a reader of either the Daily Reckoning or Money Morning. In those free daily e-letters I've spent the last seven years laying out my analysis of what's going on in the world and what Australian investors should do as a result.
I won't go back over the whole seven years.
But let me briefly show you why I'm convinced the next ten years will be nothing like the last ten and you must prepare your portfolio for that today.
Take a look at the following prices from April of 2002:
A lot has changed since 2002, hasn't it?
The stock market was trending down. John Howard was Prime Minister. The words China Boom and Commodities Supercycle were not common place among investors.
But China and the commodities boom were the single most important trends of the last ten years – trends I consider highly unlikely to continue for the next ten years.
In economic terms, China's growth was coming off a very low base.
Ten years of double-digit annual growth from a low base is possible. Another ten years off of a bigger base? Not likely.
China's boom also caught commodity suppliers like BHP Billiton and Rio Tinto wrong-footed. They didn't see it coming. A big gap opened up between Chinese demand and tight global supply. This forced commodity prices up and resulted in record earnings for the big miners.
BHP reported a $22.5 billion annual profit in August of 2011, the largest corporate profit in Australian history. But now, you have the opposite...growing commodity supply and slowing demand.
These trends were once-in-a-lifetime events that boosted your investment returns...but can't be relied on to do the same as you near your retirement years.
Consider this basic fact:
Chinese GDP is up 530% in the last ten years. That single fact created a huge bull market that should have made Australian investors wealthy... and probably made them think investing was easy.
Rio Tinto shares are up 88% in the last ten years. BHP Billiton shares are up 223%.
Both companies boomed on the back of Chinese demand for iron ore and coal. Chinese investment in new cities, bridges, and infrastructure created a once-in-a-lifetime boom in steel making ingredients. BHP and Rio both out-performed the S&P ASX/200, which is up around 30% in the same time.
Commodities boomed too. Oil is up over 330% in the same time, while gold (in US dollars) is up over 450%.
During the last ten years, Australia became the world's second-largest producer of gold and the world's leading exporter of sea-borne coal. For the extractive industries (most of the Aussie share market) you'd be hard pressed to find a better ten-year period in Australian history.
And that's exactly the problem...
When things can't get any better, they usually don't. They get worse.
Let me just take one example, the Australian dollar. It's become fashionable to refer to the Australian dollars as a "safe haven" currency. Once the "Aussie" broke through parity – one for one with the US dollar – in 2011, the mainstream press saw it as a sign of Australia's economic health and vitality.
Hardly a week goes by where some columnist or economist doesn't refer to "our strong dollar" as evidence that everything in the economy is fine. Take a moment to look at the chart below. Really look at it for a second and think about what it means.
Safe haven or ready to tumble?
The chart tells me the Australian dollar is anything but "safe." Look at what happened to it in late 2008. It crashed! Investors fled out of speculative "risk assets" and back into US dollars and US dollar bonds.
True, the Aussie then rallied from 60 cents to 90 cents. Interest rates on Aussie government bonds are also higher. For example an Aussie 10-year government bond yields about 3.70%, compared to 1.97% for a 10-year US government bond.
Bond yields change all the time. But that difference in yield can make a currency attractive to foreign buyers. And it's also true that the Aussie has stayed at or above parity for well over a year now. If all you looked at was 2011 and 2012, you might very well think of the Aussie as a STRONG currency.
But you know what this chart tells me?
It tells me that the Aussie dollar is incredibly volatile. Foreign money flows IN TO and OUT OF Australia quickly. And when the next negative event occurs, I predict the Aussie dollar will lose its "safe haven" status and crash.
What negative event could trigger
an Aussie dollar crash?
The trigger event for an Aussie dollar crash could be a continuation of the European debt crisis.
It could be a China crash. Or it could be something entirely unexpected...some political or social event that rises out of the economic and financial uncertainty.
I won't go into any more detail because those are exactly the sorts of problems I write about regularly in the Daily Reckoning.
Here, I want you to be aware that there ARE solutions. But you can only find the right solution if you know what the problem is. My view is that the next ten years in Australia are going to be much more difficult for investors – even without a major crisis (which I consider highly likely).
The last ten years were phenomenal. But for every boom, there's a bust. And I'm afraid the bust which Australia has so far managed to avoid may finally hit these shores in 2012.
So how can you prepare?
Take these three steps before
the next financial crisis hits
For the last two years, I've used AWG to warn Australian investors like you about threats to your wealth and unique investment opportunities.
I've spent the last fifteen years travelling the world and working out of offices in Paris, London, and Baltimore developing this strategy. The last seven of those years I've spent right here in Australia.
My strategy includes three basic ideas:
To my knowledge, no other financial commentator in Australia offers anything like it. Again, this approach is based on nearly fifteen years experience studying and writing about financial markets and then recommending specific investments.
I'll grant you that it's an unusual way of boiling the big picture down to a few actions and decisions.
The bottom line is: it works.
I wouldn't expect you to take my word for it, of course.
If you look in the box to the right you'll see what some of my readers have to say. By the way, it's a little embarrassing to republish the nice things other people have said about you.
But what other readers say may help you decide if what I'm doing could help you too this year. By the way, the emphasis added in these remarks is mine.
Now, let me assure you that not everyone has such nice things to say about me.
Some people don't like the direct style of my writing. Some people have actually told me to take my bearish ideas and go back to America! And of course, like any investor, my ideas could simply be wrong.
What's more, AWG is not your typical share-tipping newsletter.
I try to write an investment report for you that focuses on the long-term and on the big ideas shaping the world and affecting your investments.
I'm just as focused on potential threats as I am potential opportunities. And there are some months where I don't even tip a share.
If you want a monthly-tip sheet with an Australia-only focus – I can most definitely say that what I do is not for you. Don't bother. But if you ARE interested in my three-part strategy for getting to retirement with your dreams intact, let me quickly give you an overview.
The Australian Wealth Gameplan:
In any given year, that translates into about 6-8 active investment recommendations, although I can go months at a time without recommending anything new, only to make two or three new recommendations when I'm onto a new idea.
Right now, I'm of the view that 2012 will be dominated by a series of events.
All of those events are, in some way, related to a profound crisis in the US dollar. In Europe, it's led to a debt crisis. In China, a political crisis. And here in Australia, the trouble is that no one is sure how all these foreign factors affect Aussie stocks.
Well, as I've said, no one can know for sure. But I've made it my mission each month (and each week) to try and figure out what it all means...and then turn it into an investment strategy you can use.
If that sounds interesting to you,
here's what I suggest you do now
Take a 30-day trial of Australian Wealth Gameplan. The trial offer means you pay up front, but you can get all of your subscription money back at any time in the first 30-days if you decide it's not what you're looking for.
Also, if you order today you can claim a 33% discount on the subscription price. The normal price for an annual subscription is $299. But since you and I don't know each other, and since you don't know if you'll find my work useful, I'm happy to offer you an introductory one-year subscription price of $199.
That gives you a full year to thoroughly review my work and determine if it's right for you.
If you're happy with AWG at the end of that year, your subscription will be automatically renewed for another twelve months at the discounted annual price of $278 per year. Your subscription will continue to be renewed at this price each year until you decide you no longer want the service.
Now, here is exactly what your subscription entitles you to:
Chance Favours the Prepared Mind
If you're still reading this, I'll assume you're interested in the work I do at AWG.
I'd humbly suggest you indulge your curiosity and take advantage of this offer today. The financial world is in the throes of great and unpredictable change. As the great French scientist Louis Pasteur once said, "Chance favours the prepared mind."
This is your chance to prepare for what's ahead. The future is, of course, unpredictable. But at the very least, you can be thinking about different futures and how they'll affect your wealth. This kind of thinking and preparation could be the difference between a comfortable retirement and one filled with anxiety and regret. I can't guarantee you that I'll see all the big risks coming.
And I'm sure to miss some of the better opportunities. It's inevitable.
But I CAN promise you that you won't find a more thought-provoking, entertaining, and useful "big picture" investment advisory in Australia. And that's more important now than ever before.
CLICK HERE to Claim Your 30-Day no obligation trial of Australian Wealth Gameplan.
Editor, Australian Wealth Gameplan
P.S. I hope you'll take advantage of the first-year introductory offer to Australian Wealth Gameplan and decide for yourself if my big picture views can contribute to a more comfortable retirement.
But if you'd rather not, that's fine too. I just want to make sure you're not without some guidance in the challenging investment climate ahead. There's too much at stake to simply do nothing and hope.