June 2006

Markets swing in long cycles lasting 10 to 20 years.  In each cycle, money moves from paper-financial assets (stocks and bonds) to tangible “real” assets such as real estate, collectibles, commodities, small businesses and then back again.  These cycles are known by those with a keen sense of history, but easily forgotten by many risk managers.

Tangible assets are backed by either a good such as real estate, or the consumable product that they represent (grain, oil, rubber, land).  The value of the asset is apparent and of use, when directly owned by the investor.  Financial assets, on the other hand, lack tangible value; instead, they represent an IOU, from the issuer (government or corporation) of the security.

When Tangibles are in a bull market, financial assets struggle mightily.  When a bear market in tangibles exists, financials perform well, such as the period 1982-1999.  The opposite was the case from 1966 until 1982 when the Dow failed to make any gains for 16 years, and lost about 40% of its real value.

Consider recent history…the bull market in financial assets began to end in 1997 when the average stock stopped going up.  Bonds went higher, making the final ascent of their 23 year bull market in 2003.  Meanwhile, the bull market in tangible assets began in 1996 when real estate began a decade of double digit annual returns.  Precious Metals and commodities, following the catastrophic melt down of growth stocks in 2000, started their bull market run that is over six years long to date.

We believe that tangible assets play an integral role in a balanced portfolio, and we believe that they will continue to play an essential storehouse of value role in our client’s portfolios.

Barnes Capital is a Registered Investment Advisor located at in downtown Lafayette. With RB Capital Management, Barnes Capital develops custom tailored portfolios for its clients. Specialized in retirement income portfolios, financial planning in an integral part of our process. Call 925-284-3503.

This entry was posted on Thursday, June 1st, 2006 at 2:43 pm and is filed under Other Thoughts. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.