Risk Free Investing is a Joke. What Does This Mean for your Entitlements?
02 April, 2013
For decades The Western world has been blessed with stability and growth. Those under 30 had never experienced a real crisis in their life. This has given us a false sense of security.
The current situation shows that not all is what we thought it to be. This article will explain why a lot of people pay a heavy price for the current developments…
The stability we have had translated itself into the way we plan our financial future. Especially in northern Europe, as soon as you start your first job, you will get into a pension plan. Calculations will be made, explaining what your financial future will look like. 40, 50, 60 years into the future.
To guarantee this future, pension funds are obliged to invest according to strict rules and regulations. To keep an optimum, risk free and well diversified portfolio.
Looking at the portfolio of an average pension fund, you can indeed verify this claim. But what are they investing your money in and why?
In the 50's investors used to invest according to the Modern Portfolio Theory. This theory basically explains how diversifying in different asset classes, protects your portfolio from the risk created by one individual asset class.
The problem is that this theory does not protect the portfolio against big market corrections that affect different asset classes at the same time, like the one we saw in 2008.
In the 60's, portfolio theorists have found the answer in the so called risk free investment (readers of the first article will see a pattern emerging here).
Risk Free Investment? That sounds great!
So what is a risk free investment? There are no risk free investments.
Most people in the financial world have a memory span of maximum 30 / 40 years, since that is the time they are working. The last 40 years government bonds of Western nations were risk free. And still, they are perceived as a safe haven today.
Countries like the United States, Germany, and the Netherlands can borrow money for next to nothing. Institutional investors are heavily invested in these countries.
The Germans were even able to issue bonds at a negative yield, meaning: you have to give them money in other to by able to lend them money. It is genius.
And how risk free are government bonds?
History has shown that government bonds are everything but risk free. Holders of the mentioned German bonds, in the 20th century alone lost their entire investment three times!
But this cannot happen anymore, times are different! Right?
The southern European countries show us that also in current times countries can go bankrupt. Or does anyone still think that Greece is paying back all its debt, plus interest?
So these “Risk Free Assets” that are not risk free at all? What else?
Another great negative is that world wide all central banks are debasing their currencies. This inflation of the currency supply will inevitably lower the exchange rate of every single unit compared to goods and services in the market place.
The Euro or Dollar you will one day receive, will never buy the same as the one you put in now!
The previously mentioned risk free bonds are also denominated in fixed units. Every round of bailouts and quantitative easing slices a piece of their purchasing power.
So far, inflation is not on the radar of the markets. But it will. Especially, when bank start lending again and all that newly printed money will start circulating.
The way things are going now, an entitlement plan that provides a good standard of living now, will look completely different 10 years from now. Let alone 40.
Where to go from here?
The world needs a new paradigm. A new way of assessing the real worth of assets and investment portfolios. One that is not tainted by the disastrous policies of our central planners.
Asset, portfolio and pension fund managers need to understand that their methods are becoming obsolete, and the rules applied to them are not in favor of their customers. Hopefully they come to their senses soon. The population has entrusted the capital of many years of hard labor into their hands and many place their entire future well-being in their hands!
What do you have to do? If you have made it this far into the newsletter, you must now understand that you simply cannot count on the promises of the politicians, the central bankers or your pension fund.
History is filled with examples of people who were wiped out, because they relied on those exact same promises. In the future many people will be wiped out because they rely on them today.
You will not be one of them.
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