Back to the Future – Hypothetical thoughts

Consider the following scenario. By a quirk of fate, you are for a few moments sent to 2021 (1 Decade ahead). Being a finance person, your first instinct is to get a  Finance Almanac to take a look at Nifty as well as other asset class such as Gold / Rupee-Dollar / Real Estate. The idea is to know what asset class will work best so that when you are sent back to the present – 2011 you can invest in the best. 

But instead of the asset classes being higher than current, you see that all asset class prices have actually halved. This can happen either due to actual fall in asset prices or just inflation eating into the returns. Either way, lets assume that your almanac shows that Nifty is now at 3000, Gold is at 1250, Real Estate at 50% current price and Rupee-Dollar is 25 (vs. 45 today).

The big question then is, how do we grow our networth if there is no growth in any of the asset classes that we usually use to invest. This is of course a very hypothetical question, but not something un-imaginable. Just ask Japan. Nikkei came all the way down from 38K to 7.5K, Gold in terms of Yen went down since Yen appreciated strongly while Gold (International) itself did not move much (except for recent couple of years), USD/Yen went from 278.31 in November 1981 to 79.75 in April 1995. In other words, for the Japanese, every investment since 1980 has turned out to be far worse than anything imagined.

One of the way out is to invest in Fixed Deposits, but remember, there is no guarantee that there will be high interest rates either. Japan for instance has been at Zero for a very long time and still the economy has not grown. Its a sort of a double-dhamaka but one that has the worst possible outcome.   

Whether India will suffer a similar fate is tough to answer at the current juncture. In my opinion, 2003 – 2008 can be termed as the lost half decade. We lost the opportunity to move higher because we felt that it was our god given right to grow at 9 and dream of 10. Now the pain will come to bite us and the only question that remains is, how strong is the bite.

Having said all this, I still do not believe that we have topped out. I feel that we may actually be at the stage that Dow was during the 70’s, see-sawing though the decade before one of the biggest bull runs got unleashed in the 80’s. The idea of this post is more of a effort at loud thinking at how we should allocate our resources should things go bad from here.

Cheers

Prashanth