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The Smartest Possible Investment Strategy For The Retired Expat

“Even experienced investors can make very bad bets,” writes Retirement Planning Correspondent Paul Terhorst.

“Take John Paulson, for example, who made megabucks shorting subprime mortgages in 2007. Last year a Paulson hedge fund lost over 50%, mainly by betting on Bank of America. B of A’s stock collapsed in 2011, and, at the end of the year, Paulson finally sold out at a huge loss.

“B of A promptly turned around, and, 2012 year-to-date, is up sharply. Paulson lost out.

“Or take Fortune magazine. In a 2000 article, Fortune chose 10 stocks ‘to last the decade.’ Among the picks were Nortel, Enron, and Nokia, all disasters. If you had put US$100,000 into Fortune’s very best decade-long picks, you’d have had only US$55,000 by 2010, according to Canadian Capitalist.

“Gold buyers failed even more spectacularly. Richard Nixon closed the gold window in the 1970s. Gold promptly shot up to US$900 an ounce by 1980. Time to buy gold, right? Gold fell in 1980 and kept falling. From 1982 gold remained essentially flat. A 1980 investor would have waited until 2008 to get back to US$900. That’s 28 years of failure, with people yelling at you to buy gold from nearly every corner. Buy. BUY. BUY!!! The dollar was going to collapse, gold was going to skyrocket, we needed to return to the gold standard to save the world economy.

“I mention these failures partly to scare you. Investing involves risk.

“And partly to drive home the point that no one knows what markets will do.

“So what’s the average investor to do? Specifically, what should a retired expat do with his/her stash? Diversify. Stick to your game plan. Follow your instincts.

“You know you should diversify. Buy stocks and bonds around the world in different currencies. Throw in some real estate, again in different countries, and perhaps some gold and silver. My friend Lief Simon does a good job explaining how to diversify. I’ll skip over the details here, except to point out that surveys suggest many of us fail to diversify. We fail to follow sound advice. Rather, we tend to put our eggs in one basket. I admit I fall into a two-basket category (see below).

“Perhaps even more important than diversification, we need to adopt our own investment style and stick to it.

“In my case, for example, I dislike the thought of buying gold. Gold produces nothing. We can’t eat it, make airplanes with it, grow crops with it, or teach math with it. When we produce gold we take it out of a hole in the ground, called a mine, and stick it in a hole in the wall called a vault. Gold mania seems silly to me.

“With my anti-gold feelings I could remain satisfied from 1980 to 2008, as explained above. Gold bugs were wrong, I was right. Twenty-eight years of being right can make anyone feel superior.

“Then gold began to climb and has nearly doubled since 2008. I was right and satisfied no longer. I was left out.

“So be it. I think we’re better off investing with our instincts and feelings. I think we’re better off staying in our comfort zones.

“A friend recently told me of a hot stock, call it HS, for hot stock. HS had doubled and was going higher, no doubt about it. My friend’s broker bought the stock for his own account and knew top executives personally. ‘Paul,’ I was told, ‘get on the bandwagon.’

“I spent about five minutes studying the stock at finance.yahoo.com. I decided to pass. For one thing I could never figure out what the company does, exactly. The company profile reads like the tax code.

“More importantly, HS seemed to be a momentum stock pick.

“We used to believe in buy low, sell high. Short sellers would sell high and buy back low; only the order changed. But momentum investors buy high and sell higher. HS has doubled, so momentum investors pile on.

“Momentum investing has become the rage. Momentum investors have shown brilliant returns over the past several years.

“But, in my case, as with gold, I dislike the idea of momentum investing. Momentum players exaggerate market moves and destroy value, in my opinion. They follow the greater-fool theory, or, as I prefer to call it, the I’m-smarter-than-you-are theory. Since everyone is smarter than the other guy, everyone figures to get out before the crash. They’ll make money on momentum alone.

“Not for me.

“As with gold I’ve missed the momentum gains of the past several years. Again, so be it.

“So how DO I like to invest? Regular readers know the answer. I like world stocks and natural resources. I like investing in stuff, or at least the natural resources industry uses to make stuff. I stick with these two sectors. I’m satisfied with my results, even though I’ve missed huge gains elsewhere in gold, momentum, and other strategies.

“You may be more comfortable with real estate instead of stocks. Friends have invested their entire retirement savings in U.S.-government bonds paying practically zero interest. You may be more comfortable doing the same. Another friend recommends annuities. He says as soon as your stash hits a desired level, buy a fixed, lifetime annuity and forget about markets and trends. Again, you may find annuities to your liking.

“Think back over your investment successes. How did you get there? By luck or hard work? See if you can figure out how to do it again.

“Choose your investment style and stick with it, period. Forget about the trends of the day, about making spectacular returns, about bragging rights. You want ease and comfort to enjoy your expat right. Make sure your investment strategy remains in sync with that goal.”

Kathleen Peddicord

P.S. Retirement Planning Correspondent Paul Terhorst writes a regular monthly column for my Overseas Retirement Letter.

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