IL Postcard

Five Tips for Better Retirement Investing

Date: 12/15/2007

Sunday, Dec. 16, 2007

Learn more about investing for retirement in International Living Postcards--Sunday Edition

Last week I wrote that I was confused and scared by today's economic logic. The price of oil skyrockets without driving up other prices. Governments impose price controls, but local businesses make more money than ever. I gave five examples in total, all difficult to figure.

What's going on?

I concluded that, in light of so much confusion, when investing our retirement stash we should diversify, avoid trying to time the markets, keep extra cash on hand, and make sure your portfolio has a level of risk you can handle.

Sticking to basics should get us through. Still, if possible we'd like to understand what's happening, rather than blindly following textbook principles. I talked to a couple of economists, to a savvy investor friend, and to my mentor, Rodrigo--the guy who showed me how to retire at age 35. Based on these talks, I've come up with two factors that help to explain some of what's going on--globalization and worldwide liquidity.
I know you're concerned about your retirement stash and about having enough to live on down the line. I am too. By taking globalization and worldwide liquidity into account, we can better figure out the economic puzzle and invest with more confidence.

When you and I studied Econ 101, globalization was only a pipe dream. Now globalization seems here to stay, and I think the impact has been far stronger than even its most devoted supporters imagined. There is a worldwide abundance of capital--this excess liquidity comes from loose monetary policies, from OPEC (Organization of the Petroleum Exporting Countries) oil dollars flowing into capital markets instead of goods and services, from decades of worldwide growth, and from other factors. Again, when we learned our economics, we assumed a closed system, without flight and not-so-flight capital (money/assets rapidly flowing out of a country) moving quickly around the world.

If I'm right, taking the factors of globalization and liquidity into account should go a long way in explaining the five examples I wrote about last week. Let's take a look:

1. The price of oil goes up without generating inflation.

Explanation: Only transportation itself has gone up, a relative lightweight in the price index. Prices of other goods and services have stayed low because of offsetting efficiencies. Wal-Mart may pay more to transport toys from China to stores. But Wal-Mart saves money by shipping bigger volumes with less paperwork, less waste, and better control. Globalization saves the day.

My conclusion: We're likely to see even more efficiencies down the line, and lower costs, to offset higher energy prices. Don't worry about inflation just yet.

2. Argentina defaults on its debt, yet turns around and borrows more money.

Explanation: Worldwide liquidity and low interest rates mean investors who want higher returns have few options. These investors figure they pretty much have to get in on the higher-rate Argentine debt. These investors also have confidence they'll get out before the next default. Argentines have been playing this game--the greater fool, get out before the other guy--for decades. Now with globalization, investors from around the world get a seat at the dice game.

My conclusion: Argentina's economy will probably collapse, later rather than sooner. Make sure you're not a victim. If you want to bet on emerging markets, choose Mexico, Brazil, and especially China.

3. Chinese producers face price controls and high inflation, yet make more and more money.

Explanation: Cheap capital allows producers to upgrade and expand production, thereby lowering average costs.

My conclusion: It’s likely that China will continue to outperform, although with inevitable hiccups. Chinese stock markets have lagged the country's underlying economic growth, even after the current run-up. If you can stand the high volatility, buy China on dips. I own FXI, an exchange-traded fund of big Chinese companies, for the long haul.

4. Housing used to drive the U.S. economy, yet the economy seems healthy now in the face of the recent housing collapse.

Explanation: Globalization has tanked the dollar, enabling the U.S. to increase exports. Exports take up part of the slack.

My conclusion: House prices will continue to fall, probably another 30% or so over the next five to 10 years. We've seen this before, many times, especially in California where I was born and raised. We'll get through it. The U.S. economy has proven to be remarkably resilient and diversified. Bet on future growth.

5. Finally, the price of soybeans goes up, yet soybean oil costs about the same.

Explanation: With so much capital, growers can expand production, lowering future prices and expectations. Producers and crushers take example of the global knowledge economy to find offsetting cost reductions.

My conclusion: Globalization and resulting higher consumption will continue to drive commodity prices higher. Invest in food, natural resources, mining stocks, and so forth.

If we can understand that globalization and liquidity are the reasons behind this economic paradigm, perhaps we retirees can sleep a little better and invest our stash more wisely.

Let's hope so.

Paul Terhorst
“Retire Early” Editor, International Living