Kristina Hooper, CFP®, CIMA® is head of portfolio strategies for Allianz Global Investors Distributors LLC. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
A lost decade for investors and a wave of recent central bank activity signals that it’s time to adjust your portfolio strategy to boost income potential and outpace inflation.
Indeed, sobering new research released last week from Allianz SE, parent company of Allianz Global Investors, shows that the marked recovery in financial assets since the financial crisis came to a screeching halt last year. And that savers have experienced no real asset growth (on a net basis) over the past 11 years.
The Allianz Global Wealth Report
, a study of private households in more than 50 countries, found that household financial assets increased by only 1.6% in 2011. That falls far short of the 7.3% average annual growth we saw in the previous two years. This disappointing development is more pronounced on a gross per capita basis: since the beginning of 2000, financial assets have been increasing by only 3.1% a year, equal to global inflation, according to the report.
On top of the wealth destruction savers have endured, we have seen a series of central bank actions across the globe. In the latest move, the Bank of Japan announced last week it would expand its asset purchase program while holding key interest rates near zero in an effort to boost its economy in the face of slowing global demand. Specifically, it will buy an estimated 10 trillion yen in Treasury bills and government bonds, pushing the current bond-buying program from 70 trillion yen to 80 trillion yen. The move comes on the heels of similar actions by the European Central Bank and the Federal Reserve. However, Japan’s monetary stimulus program—scheduled to be completed by the end of 2013—is not nearly as open-ended as the Fed’s QE3.
The combination of crisis-fueled wealth destruction and aggressive central bank policy moves further supports our view that we’ve entered an era of financial repression. In this type of environment, governments look to suppress interest rates and increase deficit spending in an attempt to reinvigorate the economy.
Unfortunately, many investors are not well positioned for financial repression. In fact, the Allianz Global Wealth Report shows that they are becoming more risk averse. In 2000, securities represented 41% of overall assets. That number dropped to 35% in 2008 as assets were moved to the perceived safety of bank deposits, rose slightly and then fell back to that level.
The report explains, “As far as the need for long-term wealth accumulation is concerned, the tendency to ‘flee’ to (supposedly) low-risk investments, such as bank deposits, witnessed in many countries is counterproductive. The fact that savers are shying away from investments that offer the sort of returns they need means that they have to save even harder in order to create a sufficiently comfortable financial cushion. A responsible approach to provision ultimately involves a certain degree of risk-taking.”
How to Fight Repression
But in the face of a prolonged period of financial repression, investors are not defenseless. Here are four simple rules that will help ease the burden of hunting for yield:
||Quality counts. Look for companies with steady earnings and predictable dividends
||Focus on real returns. That’s what really matters.
||Invest in multi-asset products and consider tactical allocation to generate additional earnings. Some embedded advice solutions offer not only strategic allocations, but also tactical allocations.
||Never forget the importance of risk management. Now more than ever, you need to think about all forms of risk, including fat tail ‘worst-case’ scenarios.
According to the report, the biggest risks for investors are not keeping up with inflation and funding long-term financial goals. Big challenges lie ahead. But when it comes to creating wealth, not taking risk is perhaps the biggest risk of all.
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