Investing In Uncertain Times

Thomas Harding

Although the fiscal signs seem brighter than they have for some time, and the US economy currently appears to be on an upward curve, the global economy continues to be mired in uncertainty and instability. The challenge to investors is to find investment ideas for navigating the economic turbulence, as well as the intricacies of the financial markets. In fact, for some types of investment, economic uncertainty is a positive advantage.

Investing for Turbulence

One investment option that large numbers of people turn to in times of economic volatility is physical precious metals, particularly gold. These maintain their inherent value, and provide a much greater sense of security than paper assets. Although gold prices may begin to fall as the global economy improves, its growth record over decades suggests it is a sound investment choice.

Investing in precious metals can also be part of the wider option of investing in commodities markets. A whole range of commodities — oil, gas, grain, cattle, etc. — can be traded on the global marketplace as part of a diversified portfolio. Investors can hold commodity funds, with direct holdings in a commodity, but are more likely to hold investments in the form of futures or options.

By purchasing futures contracts or options, you are buying not only the commodity itself, but also a contract to buy or sell it for a fixed price at a fixed date in the future. The idea is to profit from price changes in the market. This can be very profitable, but is quite risky for the inexperienced investor, as you lose if the price does not go your way.

A favorite recourse for investors over many decades has been the stock market, and this too can be advantageous to buy into when economic turbulence pushes stock prices down. Despite the crisis, US stocks have enjoyed a bull run since 2009, largely because US corporations are healthy, even if this is not benefiting the middle classes. However, investing in stocks can still be risky for beginning investors, and requires research and due diligence.

Bonds for Lower Risk

When considering investment ideas, apart from looking at economic conditions, you can also choose between short/long term investments, or between high-risk/high-reward versus safer but lower yielding options. For instance, if you prefer something that carries a lower risk than futures or stocks, bonds are generally — though invariably – a safer prospect. In most cases, you know your money is safe, even if the yields are not high.

When you purchase a bond, you are lending money to the issuing entity, which usually pays you interest. The US bond market, the largest in the world, consists of several components, including corporate bonds, US treasury and other government bonds, and municipal bonds. Corporate bonds offer the best returns, but carry the highest risk, as companies are more likely to default.

Long or Short Term

In the short/long term investments decision, government bonds and securities, along with physical gold, are the favorite with short-term investors. Short-term investing helps you with your financial planning, and enables you to raise funds for more immediate needs. However, long-term investing is ultimately more likely to yield better returns, and is essential for retirement planning.

One investment option that facilitates the generation of long-term capital gains is ETFs, or exchange traded funds, and index funds, a type of mutual fund. These track the performance of indexes, commodities, or assets, yet can be bought and sold like stocks. As these broadly remain constant, they enable you to hold on to investment positions, and take advantage of beneficial tax treatment for long-term capital gains.

Which Investment Strategy?

As well as the types of investment you choose, your risk and return levels may also depend on your investment strategies. Choosing investment strategies really means choosing the investing style that works best for you. One example is active management — where your fund manager buys and sells in an effort to deliver returns that beat the stock market — versus passive management, where you simply track a market, and get returns that reflect the market’s performance. Index funds and ETFs are ideal for implementing passive strategies.

Another choice of investment strategies can be between value investing and growth investing. A value investor seeks out bargains, such as the stock of a solid company that is temporarily out of favor. The hope is that the market will return the share price to its true value. In growth investing, you are seeking long-term capital appreciation, choosing stocks that have the potential to outperform slow-growing stocks, such as income stocks. To minimize volatility, you can buy shares in a growth mutual fund. A version of growth investing is the momentum investing strategy, which involves capitalizing on current price trends, in the expectation that the momentum will be maintained.

As you sift through investment ideas, and consider a range of options, there is one thing you have to remember: however attractive a particular type of investment may seem, you must never put all, or most, of your resources into a single investment class. A diversified portfolio will guard you against risk, and maintain its value longer. Diversify both across asset classes, and within each class, for the best chance of security and growth.