The cornerstone of investment strategy within the framework of Common-Law Investing is government bonds of fundamentally sound countries. These bond issues reflect the condition of the tax base of the jurisdiction under the particular sovereignty. In the current climate, the developed world countries have run up unsustainable levels of debt and social security obligations, which undermine their solvency. By contrast, select emerging market countries have put sustainable policies in place and are looking much more solid going forward. As a reflection of this, they are issuing sovereign debt denominated in their own currencies. These bonds therefore provide a degree of insulation from First World insolvency (see Developing Countries for more information about countries). These should form a sizeable portion of the portfolio. To the degree that one intends to heighten the risk/reward ratio, he may add equities to the equation. The easiest way to add components to one's portfolio is through investment funds (see Investment Firm Reviews for overviews).
In the current low-inflation climate, bonds should be the primary investment. If inflation expectations, and thus interest rates, begin to rise, a shift toward equities is called for. Emerging markets equities are quite volatile and thus risky as compared with bonds. A simple chart comparison over a ten-year period demonstrates this. The top chart below is the T. Rowe Price Latin America Fund (PRLAX), which invests mainly in large-cap value equities. The middle chart is the Oppenheimer Developing Markets Fund (ODMAX), a broad-based emerging markets equity fund. The bottom chart is the SEI International Emerging Markets Debt Fund (SITEX), investing broadly in emerging markets bonds. These charts show a few things: equities develop with more ups and downs, demonstrating more volatility than bonds; while their gains may outgain bond gains, their dips outdip bond dips; and, as an aside, Latin American equities were especially hard-hit by the latest economic crisis of 2008-2009. (charts are taken from Morningstar.com -- click on the charts to enlarge)T. Rowe Price Latin America Fund (PRLAX) Oppenheimer Developing Markets Fund (ODMAX) SEI International Emerging Markets Debt Fund (SITEX) |
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Strategy |