Your portfolio - adjusting to changing times
The baby boomers that accumulated wealth over the last 20-30 years aren’t obviously changing their approach to investment, despite the circumstances now, and the outlook, being fundamentally different to the previously benign conditions.
From the time of the tech bubble, central banks, particularly the Federal Reserve, kept interest rates too low for too long and allowed other bubbles to unfold, in property and debt in particular. Property began to implode from 2007, as did the banking system which had over-stretched itself in pursuit of easy profits.
The extraordinary levels of sovereign debt are also coinciding with negative demographic trends. As the baby boomers move towards and into retirement they are saving less, spending less, and demanding more of the state’s resources, from state pensions through to health services. As we mentioned last time “the cost of cleaning up the banking crisis will be up 25% of GDP, but the cost of supporting the UK’s ageing population will be considerably higher.”
More positively, Asia and the emerging markets are steadily moving to a pre-eminent position in the global economy. This undoubtedly creates opportunities, though it will also ensure global tensions spiking from time to time.
The result will be more volatility, shorter economic and stock market cycles, growing demand for reliable income, and, for the developed economies, less growth and higher taxes.
Despite these big new risks and opportunities many individual investors (and their advisers!) still appear to chase heavily promoted new launches, which wouldn’t happen if a rational approach to building a portfolio were prevalent. And investment trends are chased too late, as investors look to achieve the impossible, buying past performance.
Perhaps the lack of change isn’t surprising because for much of the decade from the peak of 2000 the damage to portfolios wasn’t too great, as stock market downtrends were encouragingly followed by sharp bounces, and either corporate bonds or property also stabilised portfolio values. This changed in Autumn 2008 as all asset classes fell sharply.
If indeed the behaviour of markets has changed, then we too need to adjust. In the 1980s and 1990s it was fair to say that if you simply sat on decent funds you could take market slides in your stride, waiting for the seemingly inevitable recovery and continuation of the long term uptrend. That was even the case in 1987, when, despite the Crash, the UK stock market still finished the year higher than it started. No more - at least we don’t believe so.
We believe there are five elements to making money in this environment:
- there are funds that can exploit this volatility (some absolute return funds)
- there are asset classes which will benefit from their safe haven status (the US$, Treasuries, even Gilts)
- some companies will continue to thrive in this environment (global brands with strong cashflows)
- there will be sharp recoveries to exploit e.g. the UK stock market rose 60% from March 2009, and there will be more temporary but profitable opportunities
- some asset classes will continue in long term uptrends (Asia and emerging markets) and should be a permanent feature of portfolios
You will need regular feedback to help, and we will do that as we have for many years. Last but not least, some investors will prefer access to the widest range of asset classes, including the likes of ETFs (exchange traded funds). This is now available through our Wealth Management Platform – if you haven’t heard from us about this yet, do get in touch.