An Action Plan for Future Retirees

This post is specifically geared towards people who still have 15 – 30 years until retirement.

The times are changing – this ain’t your parents or grandparents world anymore when everything is rather predictable. As we’ve witnessed from this ongoing recession, a lot of the conventional financial wisdom has been thrown aside. “Invest in stocks, because they will on average yield 7.5% a year!” Such phrases may have been true during your parents time, but not today. The world of today is much different, because the factors that are pushing this world are now different. 30 years ago, China was a no-player. Emerging markets didn’t matter, because there were none. Commodity prices were strictly controlled. The U.S. dollar reigned supreme. Technological innovation drove the U.S. economy and stock market.

But today, the era of putting your 401k on autopilot is over – tomorrow’s retiree needs more insights into the future. Here are some megatrends that investors should pay attention to in the next 30 years and how you can profit from them.

Commodities

The biggest long term bull market we’re going to see in the next couple of years (including decades) will be in raw materials. The growth in commodity prices is purely fundamentally driven – it’s rather simple. As more and more nations like China and India are increasing their living standards, their demand for resources and goods will continue to rise. Imagine – 2 billion people buying more products! That increased demand will only cause prices to rise astronomically, and since the amount of natural resources on this earth is limited, the quickly increasing demand will soon far outpace supply.

In general, this commodity bull market is an across the board bull market, meaning that it literally affects every single commodity. Oil, gold, silver, corn – you name it. And considering that as of right now, there is no significant source of renewable energy, oil and other fossil fuels will continue to be in high demand.

On a side note, the demand for gold is mainly driven by central banks. As the U.S. dollars continues to depreciate (thanks to the Federal Reserve’s massive money printing), many other central banks are desperately trying to diversify their foreign currency reserve holdings away from the U.S. dollar. And since the Euro is in shambles and Japan is a mess, the only viable option they have is to buy gold. Hence, this massive demand for gold from central banks will push gold prices higher and higher.

Thus, the savvy investor will need to invest in commodity prices if he or she is to prosper in the coming decades.

U.S. Economy + Stocks – Slower Growth

As a corollary to the commodities bull market, I’d also like to mention that rising commodity prices will dampen growth for the U.S. economy, which means that stocks will grow slower. Why? Because raw material prices comprise of a major portion of a company’s cost of doing business. When raw material prices go up:

1. The cost of living goes up.
2. The cost of doing business (producing goods and services) goes up.

Hence, businesses will feel increasing pressure in terms of their costs, and since they can’t raise prices forever, their profit margins will be negatively impacted. Thus, the average 7.5% per annum we’ve experienced in U.S. stocks in the last 50 years shouldn’t be projected forward, because 7.5% is just no reasonable. In the past 50 years, commodity prices have been cheap, making the cost of doing business low. But as commodity prices are set to rise in the future, expect stock returns to shrink.

A Caution Against Emerging Markets

With growth at a minimal pace in developed nations, many investors are looking at emerging markets. I’d like to give a word of caution regarding these markets.

Emerging markets are fine, as long as they don’t fit into the following mold:

1. A good emerging market that is safe to invest in MUST have a stable political atmosphere. This is why I don’t invest in Africa. The economy in some random African nation might be growing growing growing and then BOOM. One day, a military dictator comes in, instigates some economic “reform” and the whole economy tanks. This story has happened far too often. Yesterday’s economic rocket is today’s economic disaster.
2. A solid emerging market must be in a country that’s united. By united, I mean that the nation cannot have too many factions all duking it out. Let’s take India for example. Legendary investor Jim Rogers is heavily bearish on India, because he thinks that all the religious and ethnic strife (Hindus vs Muslims) will eventually tear the nation apart. That is why I too am heavily bearish on India.

In short, the biggest bullish trend we’re going to see in the next 20 years lies in commodities. Savvy investors should look to the future, not to the past.

About the Author

Troy writes for his own blog, The Financial Economist. There, he analyzes the financial world and discusses his investment life. Check out his blog if your interested in investing, trading, finance, and politics.

 

Tags: capital investment planning, financial investment, financial planning investment, investment planning counsel, planning and investment, retirement investment planning, retirement planning

Category: Financial Planning, Personal Finance, Retirement