I have always told investors there is a time to own an asset and a time not to.
Take the late 1990s for example. This was a great time to own tech stocks as almost anything tech was seeing unbelievable gains. Come the 2000s, however, and the tech boom was replaced by the real estate boom. In 2007, the air came out of the housing bubble and rushed into commodities. Then they collapsed, and everything seemed to fall in value. Everything but what was parked in cash or cash equivalents. Instead of inflation, what we saw was a rare bout of massive “deflation.”
Being placed in the correct asset at the right time can enhance returns immensely. On the flip side, being in the wrong asset at the wrong time can magnify losses.
When you fully understand how an asset is actually performing in the economic environment, you can clarify your view of the investment and help you decide on whether or not to purchase that particular asset.
In our financial environment, our most important concern is keeping what you have (not losing money) and then secondly growing it to keep up with inflation.
To best visualize how your asset of choice is performing, imagine you have a goal of getting to the top of a hill. The best thing you can do is climb to the top obviously, and the second best thing would be to just stand still. The worst thing you could do is go backward down the hill, losing ground with every step.
Now extrapolate that to your investments.
In an inflationary environment, the best thing you could buy is something that keeps up with inflation, perhaps real estate, stocks, gold or silver; anything that is not a paper dollar, as that is the only thing “deflating” in value (oddly known as inflation).
The absolute worst thing you could do is be in an investment that is going back down the hill, actually losing value while everything else experiences inflation and goes up in price. Not only are you not keeping up with inflation like a stock might, nor just keeping what you have like cash will, you are losing value while inflation is rising.
By visualizing what type of environment you are in (inflationary or deflationary), you can better decide what asset class or a variety of asset classes to park your money in.
A simple rule to follow is if prices are rising (inflationary environment), have less cash and more investments like stocks, bonds and other non-currency assets. When things start “coming apart” and everything seems to be falling in price (deflationary environment), move more money into savings, sit on cash or own cash equivalent assets like U.S. Treasuries and bank CDs.
This article expresses the opinions of Marc Cuniberti. He hosts “Money Matters” on KVMR FM 89.5 and 105.1 FM on Thursdays at noon. His website is http://moneymanagementradio.com