With the volatility in world economics over the past few years, it is worth asking whether 'experts' can be trusted to provide any worthwhile guidance to protecting your financial future.
My personal view is that economics as a 'science' has about as much validity as astrology, especially given the demonstrably false assumptions on which most contemporary economic thinking is based. In The Sages, Charles Morris points to a 2008 survey by the Wall Street Journal which ranked 51 economic forecasters and found that of 102 separate forecasts, 101 were wrong and in the same direction. And since then economists have made repeated predictions which have failed to materialise.
So what do we do?
My own approach is to watch the news and to look at world events and draw my own conclusions about what is likely to happen. I watch a variety of different news programs from different countries in order to try and get a balanced view. Based on what I could see happening back in May ( the Eurozone crisis (particularly the uncertainties surrounding the Greek election), the continued debt problems and dysfunctional political conflicts in the USA), I switched all of my investments into Australian Fixed Interest investments, on the assumption that all of these changes would lead to decreased investor confidence and increased volatility in the share market. Sure enough the stock market fell. The Australian economy is still strong without the level of sovereign debt of Europe, the USA and Japan and is riding on the back of a mining boom that is expected to last at least into next year (though the boom could bust if the Chinese economy significantly slows.)
Looking ahead, the issues with the US debt ceiling are likely to rear their ugly heads again in September or October 2012 when US government spending bumps against the debt ceiling agreed last year and the Obama administration will need to seek a further increase. Given the coming US election it seems to me that this will be just as bloody as last years negotiations, if not worse and none of the options available to the US government ( increase debt, default on debt, print more money, adopt a more sensible taxation regime) is likely to bode well for the world economy. In Europe, the last debate in the German Parliament regarding the Spanish bailout made in clear that Germany is losing patience with bailing out the rest of Europe's economic mismanagement, which foreshadows future problems in the Eurozone. Based on all of this, my best judgement for my personal finances has been to keep my money in low risk, capital preserving investments with moderate yields.
I'm not saying that everyone (or even anyone) should follow my example. My background is in mathematics and statistics, not finance. However, I think it is open to anyone to look at the news and judge for themselves what is likely to happen in the world economy and invest accordingly.
I did try read a few different books which purported to provide good advice on defensive investing. However, as is usually the case with economic experts, their advice was contradictory, some predicting inflation in the US economy, while other predicting deflation. I investigated investing in gold bullion, however after looking at annual average gold prices since 1979, I've come to the conclusion that gold is likely to be the next bubble to burst. I base this on the fact that from 1979 to 2004, the average gold price was relatively flat, oscillating around $500 an ounce, but since 2004 it has tripled in price, showing the typical pattern of a bubble with greed and fear driving up the price beyond any reasonable value. Some of the books I have read claim that gold could rise to $10000 an ounce. But my gut feeling is that this is just another example of irrational exuberance. So if I invest in gold at all, I intend waiting till it drops back to less than $600 an ounce.
Investment experts will tell you that the stock market always rises in the long term. However, I believe that we have reached a point in history where the economic balance is shifting towards emerging economies and that the past record of the Western stock markets cannot be a reasonable guide to the future. You can't just look at graphs of stock markets over the past 100 years and extrapolate the upward trend; you need to also consider the changing realities that impact on the values of companies traded in these stock markets, realities which do not necessarily bode well for Europe and the USA.
So in a world of uncertainty and volatility, both economic and political, I think the prudent thing is to protect and preserve what you have, batten down the hatches and whether the storm. Once the fallout of the US election and the Eurozone crisis have settled, then it will be time to reassess the best way to invest.
As I said, I am not an investment expert and what I have discussed is purely my approach to protecting my own finances. Listening to experts who get it badly wrong more often than not is not an option. So it is up to each person to use their own judgement and assess what is best for them.
