Summary and Commentary
7 December 2020
To all Financial Friends
Please remember all that you read in this document is guidance, information and commentary and is not advice. Information and guidance helps you to come to your own decisions based on correct knowledge and an understanding of your options. Commentary is the personal view of the author and should be considered together with views from other knowledgeable sources.
Apart from periodic ‘round robin’ updates to Financial Friends my last major Commentary was just under 6 months ago under the heading ‘The Shape of things to Come’ As I read it now I see how relevant it has been and how relevant it still is today! I have attached that document here – it has so much that is important in today’s situation that I invite you to look over it again if I may.
If you and I were sitting down over a cup of coffee for a friendly chat and update this is what you would hear me saying;
You ask me am I a bull or a bear in the current markets? Do I think equities or fixed interest will outperform? Over the last 20 years I have invested through conviction. This as an alternative to the ‘safer’ traditional advice view that you must always diversify. Diversify? That’s spreading your money across cash, fixed interest, equities, property and perhaps a touch of gold.
Diversification can help to reduce losses in falling markets so your losses in falling markets are ‘average’ rather than extreme. When Covid hit in March a diversified position would still have lost you between 15% to 20% at the lowest point. This against a drop in the FTSE100 Index (equities) of 37% had you been 100% bullish in equities.
You are right to say traditional advice is to diversify. Some of our Course students before Covid hit, saw with me, that the global economy was already on the edge of a precipice. They had the conviction to put 100% of their pension, Isa and other funds entirely into Gilts, Investment Grade Bonds and quite a chunk into Gold. Result? Their funds rose +3% to +8% as the equity markets (FTSE 100) fell 37%. They had conviction. They did not diversify.
Conviction for a bullish outlook for equities can also work positively achieving really profitable returns, the experience of some of our students during the last 12 months.
It takes conviction and a sense of where markets might be going to take a determined stand. Intuition and a sense of ‘knowing’ is only gained by years of experience giving birth to the instinct and awareness that prompts and guides from within.
You ask me where am I invested today? Well, it goes against the grain right now for me but yes I am diversifying today! I cannot have conviction to be either totally bear or bull in today’s conditions. The Pandemic and all it’s economic outcomes are unprecedented and so uncertain that informed instinct and awareness do not lead to conviction either way.
So, Does That Mean My Thinking Is in Line With the General Mass of Advisers and Investing Public?
Diversification is traditionally regarded as sound advice across the board at all times. Rather like the Grand Old Duke of York. He marched his men up to the top of the hill and then he marched them down again. When they were up they were up and when they were down they were down and when they were only half way up they were neither up nor down!
That’s the problem with traditional advice, it can never give you the best and never the worst for your money, your life and your future. I am fond of bright colours and dislike living in a fog of average murky grey!
The market place offers you ‘Mixed Asset Funds’ and ‘Managed funds’ and ‘Default Funds’. The latter being where many people’s pension funds languish, as the fund holder has taken no interest or simply lacks the knowledge to act. Look at the performance of such strategies and I fear you will not be too impressed! These funds are the ultimate in diversification.
Then Am I Simply Diversifying?
No! In the Money Awareness Course, we discussed that when setting up our portfolios we needed to 1) Choose our fund supermarket (Investment platform). 2) Select our mix of assets (looking 2 steps ahead of the market and against the background of the current economic and political circumstances). 3) Choose the specific funds and managers to invest in to match our asset choices. Finally, plan our STRATEGY!
So I Have a Strategy?
Yes! You may be fed up of hearing this, but yes, the strategy is to be a profit taker. My conviction is that in time the markets will head back into trouble but in the meantime volatility causes fixed interest assets to rise and then equities to rise as fixed interest falls as good news then bad hits the markets. I hold funds in both camps and as one rises, I take the profits and store them in cash, the other falls and then rises again for further profit taking.
So, my conviction is to see a market correction (maybe big time) on its way. When that happens, I have a store of cash from profits taken along the way. If life circumstances needs the money it is there to tide me over while markets recover. Better still I can plough the profits taken in cash back into the markets as prices fall so leveraging my returns well above the average returns of simple diversification.
Thinking 2 steps ahead makes me consider particular categories of asset I can invest in through selecting chosen funds and managers. Investment can be through pension, unit trusts, Isa's and general account holdings.
Brexit either way makes me feel good to be in global equity and bond funds. A Brexit inspired fall in the value of Sterling will provide a potential currency gain.
Planned investment in infrastructure by the economies of the world leads me to remain in that asset class (though I am disturbed at a lack of performance to date). The UK government have announced the launch of a new ‘green gilt bond’. The borrowed funds raised will be used specifically for infrastructure projects that will tackle climate change and create ‘green jobs’.
I feel comfortable emphasising green, ethical (ESG) equity funds – why not save the world and profit at the same time? Recent data shows ethical equity funds outstripping average performance. The public are already demanding green investment as the threat of global warming increases.
I am awaiting the triggers that will bring about a surprising uptick in inflation and interest rates. This has to happen; we just don’t know when. Events around Brexit will push up prices and forecasts say an increase in inflation of 1.5% are in the pipeline with a ‘no deal’ or a ‘bad deal’ arising. My holding of index linked bonds (the yield linked to inflation) should prosper as demand for inflation protection arises.
Technology assets have fallen behind the short-term rising value of equities in general in recent times, but the popularity of this asset class makes it a ‘hold ‘for me.
Funds investing in shares of miners, particularly gold and precious metals as a small percentage of a portfolio with the outlook to increase the holding as the conditions ahead look negative is part and parcel of the package.
Eyes and ears need to be open to the major turning point where economic stimulation by the authorities of the global economy moves towards closure. As this is foreseen reshaping of portfolios ahead of time will prove prudent.
I have expressed views above in the form of commentary, inviting you to consider the points made, along with commentary from alternative knowledgeable sources. Some of my observations are controversial and offered to stimulate thinking and consideration as we continue to learn through the process of the Money Awareness Course.
PLEASE NOTE: A financial or economic commentary like these, are written to explain, interpret or give an opinion on economic events and markets to help readers understand what’s happening and why it matters. Designed to help you make informed decisions of your own by making you aware of opportunities, risks and potential rewards in the market.
