Advisors: A Conversation to Have with your Clients

There was another great article in Financial Advisor magazine this month which highlights the sort of fears and concerns that plague many generations of today’s investors, specifically those nearing retirement who are trying to better preserve capital. It’s no longer just about the magic number one needs to retire comfortably or which financial product you can buy to protect your future income against long life spans. Today’s concerns are often about the potential of current events to cause another market retreat along the lines of the tech bubble or housing crash, the sort of thing which can further jeopardize a comfortable retirement. The article suggests that some of the top concerns that clients/investors have at the moment include: 1) the debt issue and whether that may ultimately cause the US to lose its status as the world’s reserve currency; 2) the likelihood that we’ll experience severe inflation in the coming years which could dramatically impact purchasing power; 3) what are the potential ramifications of Obama’s large and complex health care plan? So let’s briefly touch on each of those and then see if we can back those concerns into some sort of investment opportunity.

In terms of being the world’s reserve currency, obviously the US benefits from that in several ways, perhaps the most important being our ability to purchase commodities such as oil at relatively low prices. It also gives us preferential borrowing rates which allow us (for better or worse) to finance our constantly growing deficit. The author points out in the article that China and Japan have already started to abandon dollar-based trade with each other, as did China and Russia, who trade in their own currencies. There are also fears that developing nations like Brazil and India may start settling future contracts in their own currencies rather than dollars, an action that would be very expensive for us.

Finding the Opportunity: From an investor’s standpoint, consider buying assets denominated in currencies other than the dollar. That may hedge the risk of other currencies appreciating against our dollar. I’m not able to provide specific security recommendations due to my licensing, but there are plenty of ways investors can access non-dollar investments. Personally I think countries like Australia may provide a low volatility hedge against the dollar, and you may find securities tracking Australia that provide the added potential benefit of high yields. Another option may be to purchase stock in companies which do a substantial amount of business overseas who may benefit from a declining US dollar. There are a few companies in the mining sector that trade in the US and maintain this scenario.
On the topic of inflation, I think most investors agree it’s a question of when, not if we experience some increased level of inflation. Frankly, I think we already have but the somewhat random process we use to compute these stats may disagree with me. The past decade has shown us that when the economy becomes troubled, our preferred method of easing the pain has been to pump trillions of dollars into the economy as stimulus. If we haven’t seen inflation yet, it’s likely because the economy is still struggling, not because there aren’t enough dollars out there to reduce our purchasing power.

Finding the Opportunity: There are many historical assets patterns we can reference during inflationary times. Stocks tend to do well because companies can raise prices. Outstanding bonds tend to lose value, especially when interest rates in the economy move up to combat the inflation. Hard assets tend to act as a good store of value. If you don’t currently allocate money to hard asset classes, you may want to look into it. Gold and silver have been go-to inflation hedges over the years. Lately the correlations have changed a bit as this asset class trades way more frequently than it used to. Even so, it may present a good portfolio diversifier, especially if you don’t own any. Many investors also believe real estate investments tend to keep pace with inflation. You can buy securitized real estate through the public markets or go out and look for actual real estate. Given the low interest rate environment, this may prove to be a good time in history to inexpensively finance your real estate purchase.

On Obamacare, this may be the most complex and ignored issue that will affect many of us. I know from talking to my clients who own small businesses that the mandatory health insurance requirements are already presenting an enormous challenge for businesses which side-step giving their employees health care by hiring part-time workers. Because there is no pretty solution to how the US can keep its rapidly growing health care costs in check, the best we can do is try to pick sectors which may benefit from the shifts caused by this legislation.

Finding the Opportunity: Even with the added administration and headache, the health insurance industry may come out a long term winner. Despite being forced to give up their selectiveness with respect to who gets insurance, many millions of people will be gaining insurance in the near future. The article suggests, and I think this is a very good point, that rather than focusing on which hospitals and health insurers may come out on top from Obamacare, that we instead focus on demographic issues such as a huge population of baby boomers reaching their 70′s this decade, living longer, and using more resources. In terms of companies impacted, some would say that companies which handle medical waste may be an interesting option, along with companies that handle medical billing and record keeping. In terms of losers, it’s already been well publicized that medical device makers may incur a huge tax going forward, one which has already caused several device makers to announce layoffs. Oddly, many of their stocks are still doing well. Again, I can’t recommend specific securities but this is fairly easy homework to do on your own.
As a note to other advisors, I think the idea of engaging in conversations about these topics may be worthwhile. Even if your clients don’t call up with this many specific questions, showing your clients that you can be tactical and position a portfolio around the current economic environment builds trust and can get you back in touch with people you may not speak to all that actively.

As always, feel free to reach me with any questions or comments.

Russell Bailyn

Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *231
F: 212-752-7673

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.
All investments involve risk, including possible loss of principal. Investing in a security concentrating in the natural resources sector involves special risks, including increased susceptibility to adverse economic and regulatory developments affecting the sector. Many of these firms may be smaller companies which involves special risks associated with smaller revenues and market share, and more limited product lines. The prices of such securities can be volatile, particularly over the short term.
Industry concentration risk, which is the chance that the stocks of REITs will decline because of adverse developments affecting the real estate industry and real property values. Because the Fund concentrates its assets in REIT stocks, industry concentration risk is high.

Investing in non-diversified securities that concentrate in a single sector, involves risks such as patent considerations, product liability, government regulatory requirements, and regulatory approval for new drugs and medical products. Many healthcare-related companies are small and/or relatively new. Smaller companies can be particularly sensitive to changes in economic conditions and have less certain growth prospects than larger, more established companies and can be volatile, especially over the short term.

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