| The bursting of the asset bubble amidst a tsunami | | | | which would preserve your wealth from losses |
| of financial problems and the economic recession | | | | propped up by deflation. |
| has already erased more than four years of | | | | Bonds are also an option. However, investing in |
| wealth created by world's households and | | | | bonds when deflation is coupled by financial |
| corporations. However, the precipitous drop in | | | | distresses and the possibility of an extended |
| wealth is unlikely to end anytime soon. Now there | | | | economic downturn warrants caution in respect to |
| is something else to worry about: deflation. | | | | bond issuer creditworthiness. The likelihood of |
| Emerging deflation in general consumer prices will | | | | default on certain types of government securities |
| likely exacerbate the current economic and | | | | (particularly municipal bonds) and corporate bonds |
| financial problems and will lead to the extended, | | | | is heightened in the current situation in which |
| albeit somewhat less severe losses in asset | | | | corporate bankruptcies, especially in some sectors |
| values and therefore in general wealth. | | | | such as auto industry, are rising. Therefore, one |
| Institutions such as the Central Bank, the IMF, and | | | | should be very selective when opting for bonds, |
| our own banks such as AIB have all painted | | | | particularly corporate bonds, making sure that |
| gloomy growth, or rather contraction, forecasts | | | | securities with the lowest probability of default are |
| for Ireland. A central point is that Ireland's | | | | selected. Treasury bonds are the safest |
| recovery is heavily dependent on global economic | | | | investment choice. |
| recovery, and so somewhat out of our control. | | | | Certain undervalued equities may also offer some |
| Deflationary pressures have already slashed | | | | long-term value. For those who maintain |
| values of various asset classes, especially in the | | | | investment positions in equities with a long-term |
| property market. However, these pressures will | | | | perspective, sectors that could offer some |
| be sustained as the world's economies enter into | | | | relative security from the generally declining stock |
| a cycle of falling prices of consumer goods and | | | | market include infrastructure construction-related |
| services. Given that deflation negatively affects | | | | sectors, consumer staples, healthcare, and utilities |
| household income, corporate profits, asset values, | | | | such as electric power companies. |
| and the overall economic growth, it will be | | | | However, with this investment strategy one may |
| necessary to show prudence when making | | | | view deflation as an economic process that |
| investment decisions in the current market. In | | | | reduces opportunities to maximize wealth creation. |
| fact, for deflation, there is only one right | | | | Quite the contrary! Conservative investment |
| investment choice: preserving capital. | | | | choices in deflationary times preserve wealth |
| In deflationary times, the overall investment | | | | from losses and secure capital for the time when |
| strategy should be focused on the preservation | | | | high-return opportunities re-emerge. In fact, |
| of wealth rather than on the creation of wealth. | | | | deflations are the precursors of investment |
| Moreover, the goal is to concentrate holdings in | | | | opportunities that will follow it. These opportunities, |
| safe assets rather that to diversify them across | | | | when identified properly, may offer substantial |
| sectors and markets. This conservative approach | | | | long-term returns that will assure optimal |
| means steering away from equities, commodities, | | | | long-term investment performance. Still, while the |
| and high-yield fixed income securities, even from | | | | coming deflation may not last long, it will take a |
| traditionally conservative investments such as | | | | while before the economy charges ahead again. It |
| property and managed funds, and focusing on | | | | will be necessary to clean some of the excesses |
| safe liquid investments, such as cash and bonds, | | | | accumulated during the largest asset bubble in the |
| which do not necessarily produce high returns. | | | | economic history of the modern world before |
| In fact, deflationary times give true meaning to | | | | good investment opportunities sprout again. |
| the cliche cash is king. This is so because, by | | | | This cleansing process is where the National Asset |
| definition, deflation means that the value of your | | | | Management Agency (NAMA) needs to make the |
| money increases as the price of goods and | | | | correct decisions, on behalf of the Irish taxpayer, |
| services declines. There are also other liquid | | | | in order to maximise long-term sustainable growth. |
| (cash-like) investment instruments, such as | | | | Here's hoping... |
| certificates of deposit and money market funds, | | | | |