On both long and secular time frames, economic backdrop and secular trends determining savings allocation remain simple. Following 35 years falling interest rates from 20% to 2%, risk favors equities for savings replacing asset price appreciation for purchasing power maintenance over and above yield (from bonds), to retained earnings (from stocks) invested for dual secular trends: 1) population (India, China and others cumulatively) ; and, inflationary risk ahead favoring consumer convenience makers vs. hard assets (generalizing).
Rolling bear market at year end has room for further descent (equity averages) considering values of popular growth issues. Given secular change to expected inflationary economic backdrop a bear trap approaches commodity related issues and hard assets not necessarily for price due to their cyclical nature but for future purchasing power maintenance. As early railroad enterprises became crowded for savings dollars destroying wealth, steel wood stove and consumer convenience makers bankrolled an Industrial Revolution.
Nothing is different this time. Generalizing for savings with cost bases forward of 1990, sell REITs, Railroads and Hard Assets in general at ensuing cyclical upturns. As always circumstance(s) embed Black Swan event(s) – don’t buy insurance for counter trend protection, expect downturns and prepare with bubble defense: Meager debt levels with existing financial sustainability aligned with secular changes.
Heed recent lesson(s) from political management: Fannie Mae & Freddie Mac. Sell classic income equity through utilities embedded with “policy” price fixing with legacy of complete leverage precluding forward constructive investment (incentives for) required for either savings success or conversion to energy sustainable alternatives.
2016 1stQtr. Portfolio
The Hershey Company
United Technologies Corporation
Illinois Tool Works Inc.
or, an S&P 500 index fund
Portfolio Yield, 2.43%
Yield including retained earnings, 6.64%
Trailing 3yr avg. Earnings Power, 4.4% (shorter term comparison to fixed income)