Think About Global Diversification

07/08/2011 3:15 pm EST


Marc Faber

Editor and Publisher, The Gloom Boom & Doom Report

Spreading your investments into different sectors is crucial, but it means less if you're keeping your whole nest egg in one economic basket, says Marc Faber of the Gloom, Boom, & Doom Report in this exclusive interview with

Mark, we were talking about the hideous amount of monetary expansion and deficits in the United States. What do you make of the emerging markets today?

Well basically, you see as I explained before, when you drop dollar bills onto the United States, you don’t control where they go.

Because the profit opportunities were better in emerging economies, and the currencies were undervalued vis-a-vis the US dollar, a lot of money flowed into emerging economies. Also, because of the US trade and current-account deficit, that led to some bubbles in emerging economies.

Now, I’m not saying that every emerging economy is in a bubble stage, because some have already deflated quite badly, like Vietnam.

On the other hand, we have property bubbles, say in China. In China, if we define a bubble as an environment where interest rates are significantly below the rate of cost of living increases, or below the rate of inflation, then we have in China a gigantic bubble. We have huge credit expansion, and demands of large credit grew at the fastest pace ever.

So easy monetary policies in the US may not necessarily lead to a renewed, strong rise in home prices in the US, but it can lead to bubbles somewhere else.

That’s the beauty that Bernanke doesn’t understand.

Well how do you, then, break down a portfolio? Because you actually will buy bonds.

Well the thing is this: I believe that none of us knows how the world will look like in ten years’ time, so we have to kind of have a diversified portfolio.

I would also add that proper diversification would involve having your assets under different custodians. In other words, not all your money with one bank in the United States and one investment bank in the US, but some in the US, some in Canada, some in Australia, some in Hong Kong, Singapore, wherever, but not all in one country.

Why? Because in the US, we’re moving more and more toward foreign-exchange controls. It’s very difficult now for Americans to open bank accounts overseas. They can buy real estate—that’s probably the best avenue to shift money overseas.

But anyway, I would as a starting point today, given that the markets already have had huge moves, have something like 20% to 30% in equities, 20% to 30% in precious metals, and then some real estate, 20% to 30%. Ideally you own the house in which you live without leverage.

Then about 20% to 30% in cash—and there I also include bonds because I can roll over the bonds every year. I have bonds that mature, and so the average duration of the portfolio may only be three or five years.

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