International investments can help fight inflation especially when we do not get too caught up in success. For example our dollar short multi currency international investments portfolio is cleaning up with the falling US dollar right now. But let’s don’t take these profits too seriously.
We’ll see how international investments in Ecuador real estate around this lake Yaguarcocha can profit from a falling dollar. First, let’s look at how to maximize the purchasing power of your international investments.
The key to all successful investing is the protection and increase of purchasing power. International investments can help you achieve this, but attaining and keeping success can be trickier than it might seem.
Take for example, readers who follow our Borrow Low-Deposit High Educational Service. They were in a position to clean up from international investments last week when the US dollar fell.
This is because for 2007 we have added a pure dollar short portfolio.
This is described in this excerpt from the 16 page report “The Titans Clash” which says:
“The 2007 Dollar Short Portfolio differs from last year’s dollar short. This uses a 100% dollar loan and has no USD investments. The starting date for this portfolio was November 1, 2006. Here is the 2007 US Dollar Short Portfolio.
The Invested amount is US $300,000.00 comprised of $100,000 original capital and US$200,000 borrowed.
The portfolio was invested as below:
|AUD||5.00% BK Nederlandse Gemeenten 16.07.10||30,000|
|BRL||12.50% Brazil rep. of 05.01.16 104.75||12,000|
|GBP||6.375% Rabobank Nederland 20.03.09||30,000|
|HUF||6.50% Hungary Gov. 12.08.08 97.40||15,000|
|ISK||9.50% Iceland 13.06.2008 98.96||12,000|
|MXN||9.00% Mexican Bonos 22.12.2011||15,000|
|NZD||6.00% KFW 15.07.2009 97.18||18,000|
|TRY||10.25% KFW 09.02.2008||12,000|
|EUR||6.25% Turanalem Finance BV 27.09.2011||15,000|
|EUR||4.75% Iss Global A/S 18.09.10 95.46||15,000|
|EUR||8.625% NXPBV 15.10.2015 105.50||15,000|
|EUR||JI Favourite Fund 83.00||21,000|
|EUR||JI German Equity Fund 80.25||15,000|
|EUR||JI High Yield Corporate Bond Fund||15,000|
|JPY||JI Japanese Equity Fund 9927.00||15,000|
|EUR||JI European Equity Fund 120.80||15,000|
|EUR||JI Emerging Markets Bond Fund EUR||30,000|
The idea behind the 2007 US Dollar Short Portfolio is that in 2007 the US dollar will drop in parity versus other currencies. This is a mixed portfolio of bonds and equities. About one third of the portfolio is in emerging markets and the balance in industrialized bonds and equities. This portfolio is meant to produce income and capital appreciation, plus gain a forex profit in US dollar terms to protect against erosion of the greenback’s purchasing power if it falls.”
You can receive the full report “The Titans Clash” plus the $49 report “Borrow Low – Deposit High” free when you enroll in our Multi Currency Investments Tracking Service. Our annual subscription rate rises to $149 January 1, 2007. Save $50 and subscribe now. See details at https://www.garyascott.com/catalog/bl/
Over half of this international investments currency portfolio is in euro or euro linked international investments so as the dollar collapsed versus the euro, profits shot up in this portfolio.
The $200,000 loan converted to euro at 1.27 euro per dollar requires 157,480 euro to repay. A sudden drop in the dollar to 1.31 means that it now only requires 152,671 euro to repay. This a profit of 4,809 euro or $6,299. A pure dollar loan invested all in euros picked up a 6.22% profit in weeks!
Now, let’s examine why this profit can be elusive.
First, many investors take a spurt in profits seriously and spend it! They have not learned how to survive cash spurts and sudden wealth.
I learned this lesson the hard way as a young executive, (just 25 years old). Back in the late 60s and early 70s I worked my heart out for four years, almost sacrificed my family and ended up divorced by trying to build a financial future.
I thought it was worth the stress. The stock market had been rising for decades. The bull market was all I knew, shares rising, IPOs were coming out every day-almost guaranteed success. The industry I worked in (overseas mutual funds) was in a hot sector and the company I worked went public.
My compensation was generous, a stock option for 50,000 shares at a dollar each. The shares were issued to the public at $20. At 25 I was already a millionaire and those were the days when you could buy more than a house for a million dollars! In fact a million then was worth about $12 to 15 million now.
I had not learned any lessons about locking in profit nor the downsides of markets. I had never made more that $750 a month so this wealth was bewildering. I bought everything I could, a new Mercedez 280 SL, a new house and I ran up some nice credit card bills.
Then the stock market collapsed. The sudden drop caused a run on the shares of the company I worked for and it with many similar firms collapsed. The entire industry tanked and the company went broke. I ended up unemployed but with no money and in debt. My stock options weren't worth the paper they were printed on.
The moral…when you invest to make money be careful. You may make it! If you do not respond correctly, the sudden wealth can make life worse rather than better.
Most wealthy people receive their income in spurts. We saw this process regularly during the internet craze. Executives left proven fields to begin bold new startups and in an instant became billionaires!
My experience suggests that sudden financial success creates disaster as often as not. Invertors all too often make one of two mistakes. The first mistake is to believe this is the only time there will be such an influx of cash. This tightens a person, so they can't enjoy spending. They become afraid. Life becomes filled with paranoia. Unhappiness sets in. If money doesn't make life better, what's the use?
The other mistake is to think that these large chunks of cash will come easily again and again without working. This thinking creates unrealistic lifestyles and work ethics that lead to disaster.
I first observed this ironic fact while living in England. A happy, financially responsible middle class family won millions in the lottery. Just a few short years after reaping this spurt of cash through supposed good luck, the husband and wife were bankrupt, divorced and no longer speaking to their kids.
I have seen example after example, of people, who received a sudden chunk of income made very unhappy by this large inflow of wealth. This is why it is a risky time when investors make a big sudden profit. The proud owner of new found wealth, buys new cars, houses and becomes very spendy. They create overhead and debt. If there is a single reversal, they are wiped out.
How much is a big hit anyway? One measure is a ten times increase in wealth. This normally is enough to make a significant difference in a person's life. For someone with a thousand dollars in the bank, $10,000 seems like a lot. The extra money can make a difference. For someone who already has a million dollars, another million doesn't make such a significant shift. Ten million does.
The reason spurts create problems is because they disrupt our discipline. Money is discipline and our financial affairs have some form of economic routine, either self imposed or not.
We have a set of mental standards that makes us think, “I can afford this, but can't have that”, etc. Spurts of wealth demolish these standards. Suddenly we can have many things we previously could not. We become, once again, kids in the proverbial candy shop.
Yet much of the Western world spends their lives trying to become and stay independently rich. If succeeding in this process can ruin happiness, what can we do?
First, realize that independent, permanent never-ending, fearless wealth is a process, (not a state) of a continual series of reasonable risks, mistakes, refinements, lessons and actions that culminate in getting it right. When success arrives, there is a huge income (or capital) spurt.
Understand that this is not the only time you can make a huge wad of cash.
Impose discipline. Here is a simple formula if you cannot create your own.
The formula begins by immediately spending ten percent of the new money on your dreams. Buy, the Porsche. Take the world cruise. Build the new eight bedroom house. Do whatever you want that does not cost more than ten percent.
Second, give ten percent to a worthy charity. Take a little time, find a need in this world you feel really should be filled and truly give the ten percent away. Third, invest the remaining eighty percent very conservatively. Use the PIEC system (see our Inspired Investing Course linked from https://www.garyascott.com/eclub/). Hire a good, conservative investment manager such as Jyske Bank.
Finally be grateful every day, not for the lump of cash, but for all the important things in life.
Thomas Fischer and I have been especially concerned about this phenomenon because so many of the 2006 Multi Currency Portfolios we designed and tracked did so well. The Asian emerging for example took off immediately and rose 114% over the year. Now our 2007 portfolios are rising early on also. When these types of results are obtained, inexperienced investors (and even many pros) begin to ignore the risks. Having been involved with currency investments for so many years, Thomas and I do not. This on our more speculative portfolios this year we have reduced our borrowing from two times to one.
There are several reasons to be especially concerned about falling dollar profits now.
First, the world has become addicted to US spending. Americans consumers are spoiled. They continue to remain wealthy first because of the stock market bubble, followed by the US real estate bubble. These artificial wealth creators we spawned by a flood of liquidity that allowed people to borrow more and more.
This means that everyone wants the strong dollar to continue. The Asians want it to continue fueling their export sectors and to maintain the value of their investments in US dollar bonds.
Oil sellers want it to prop up their investments in the US . Europeans want a strong dollar to keep their exports competitive as well.
Next there are no strong alternative reserve currencies. Other western nations and Japan are riddled with debt as well.
Third, and perhaps most important forex profits created by a falling US dollar will almost certainly be reduced by rising costs of living. A falling USA dollar almost certainly will increase inflation in the US . So your profits may look great but won’t but any more. The best you may do is keep up, unless you invest and manage your spending well.
This brings us to the final dilemma, the Fed which aims to keep inflation down. They are headed for that proverbial rock and the hard spot. If there is inflation, they need to raise interest rates. This will push US real estate prices down further and perhaps stall the economy badly. This is two years before a Presidential election where a healthy economy means everything! My guess is that the badly suffering Republican party is doing all it can now to make sure the economy is roaring in 2009.
So beware…of yourself and political-economic tricks. The dollar is most likely to continue its decline but may do so in spurts. How you handle these spurts can make the difference between wealth and poverty!
Until next message, may all your spurts be good!
P.S. A falling dollar may push down US prices temporarily, but this favors some sectors at the low end, including real estate in Ecuador . As inflation roars and the middle class suffers increasing numbers will move to low cost living areas.
With so many forces in play we need to learn how to invest beyond logic! Join Merri and me for Blaine Watson’s course on Vedic Astrology entitled “Inspired Investing Beyond Logic.”
Merri and I will celebrate the New Year at El Meson. Join us. Look at real estate perhaps after and stay on for the Inspired Investing Beyond Logic course. For details go to https://www.garyascott.com/catalog/va/
This picture from 2meridths.com shows the wildlife at Lake Yaguarcocha . This lake had enormous environmental problems but may be on its way to healing. See how and why, plus how this creates opportunity for more international investments in the next message.