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This page contains a single entry by Associate Editor - 3 published on February 18, 2011 6:07 AM.

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Projected Long-Term Volatility May Augur Well for a Trader's Mentality

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Projected Long-Term Volatility May Augur Well for a Trader's Mentality



Guest Contribution Provided by Forex Traders


One decade is behind us, and a new one is beginning, just the right time to do a little long-term planning on the investment front.  The last four months have been very favorable for holders of stock, but the first nine months of 2010 were anything but a rollercoaster of volatility that showed no signs of letting up.  Recovery optimism may be fueling the current rise, but major deficit and unemployment issues have yet to be addressed sufficiently to warrant material appreciation going forward.  Long-term trends have been forming over the past decade, and most experts expect them to continue.

 

Emerging market economies, led by the "BRIC" quartet of Brazil, Russia, India, and China, have doubled or trebled the real GDP growth in the advanced economies of the world.  Off shoring is an international phenomenon, and low labor and transportation costs have brought about the greatest redistribution of wealth that the world has ever seen.  Those that invested in this "tsunami" back at the turn of the century have profited quite handsomely from their fortuitous insights.  The IMF and major economists have all projected these trends to continue, thereby creating a new economic world order with China passing the United States in 2020 and trebling its output by 2030.

 

What do these fundamental trends mean for a long-term investor's wealth accumulation strategies?  What investments should be included in a portfolio for the future?  Experts expect Western countries to languish in low-growth mode for some time.  Deficits will only decline when tax revenues are increased and entitlements held at bay.  Inflation, although only beginning to raise its head except in developing countries where it is on the rise, will necessitate higher interest rates and higher debt payments.  Real GDP growth will linger around 2% to 2.5%, not nearly enough to provide jobs for new entrants.

 

The good news is that companies are all focused on Asia and selling their products and services to the burgeoning middle classes there that desire to live a better life, including better homes, cars, food, and clothing.  The recent severe run-up in hard and soft commodity values is evidence that demand forces for raw materials are at work.  Trade barriers and government meddling may slow the process, but corporations are primed for this business, lean and mean from years of cost cutting, and have over $2 trillion in cash on their respective balance sheets to make something happen.

 

Emerging countries, however, want their cake and to eat it, too.  They want domestic consumption to feed on locally produced products.  They want their export trade to continue and for foreign exchange reserves to increase.  Investing in these markets may still be prudent, although some analysts believe that a "bubble" in prices has already formed.  Investments in these markets also incur the double-edged" sword of currency risk exposure.  You do not have to be an expert in fx trading to understand that returns in another currency may be high, but may also be wiped out if the Dollar appreciates relative to that same currency.

 

The same economists that opined on the current trends of globalization also stated that the road will be rocky going forward, filled with volatility as international and domestic concerns clash over priorities.  Volatility creates opportunities for investors with a tendency for trading in the markets.  A trader's mentality can produce gains when sideways actions stall even the best stock from performing.  Best practice has been "15%" for overseas allocations.  Perhaps this figure needs an increase, and prudent investors might want to brush up on technical analysis as well.