#26 🔊 Austyn’s Weekly Financial Strategy.

Below is a link to a short Q&A audio interview I’ve just recorded where I give my thoughts on these extraordinary times.

Link to Audio Recording

Nick Griffith:

Good afternoon, Austyn. How are you today?

Austyn:

Yes, very well. Very well.

Nick Griffith:

All right, good to speak to you on a Thursday afternoon for our normal weekly Q&A. It’s Thursday, the 3rd of September.

Nick Griffith:

So, let’s get started. I think one of the questions that is interesting is, what’s going on, ‘Behind the Noise?’

Austyn:

Yes, I’ve been asked various questions in the last couple of weeks about why is the American stock market doing so well? Why is it doing better than our stock market? And the reason partly is, just a massive wall of money that has been put into the financial system by the Federal Reserve. And it’s created this wall of liquidity, which is obviously designed to stimulate their economy and we’ve done the same and Europe’s done the same but in a smaller way. And it’s creating bubbles. And we’ve seen certainly in technology in the last few months that we’re heading towards bubble territory and that’s beginning to play on people’s minds.

But also, there was a fundamental shift in what the Federal Reserve said in the last week in how it’s going to run the economy, and I won’t go into it all, because it’s quite boring, but it’s about inflation targets. Basically, the Federal Reserve is saying that they’re going to allow the economy to run hot. They’re going to allow inflation to go beyond what they would normally because they want to make sure, that this time after this crisis, the real economy recovers.

Nick Griffith:

I’m just going further on this, I think you used the expression that the Fed aren’t worried about a stock market crash, or they’re not putting the normal checks and measures in.

Austyn:

Again, yes, this is a fundamental shift. So normally a Central Bank, like the Federal Reserve or our Bank of England, if they thought the economy was running too hot or that the stock markets were going too far ahead of themselves, they have a few tricks in their toolbox where they can raise interest rates just to calm things down a bit. The Federal Reserve has said that they’re not going to do that and they’re going to actually keep interest rates low for a number of years.

They’ve spent so much money trying to save the economy in this crisis. Their worst fear is that if they raise interest rates too quickly, that will stop the economy recovering to its full potential. Because they look back at 2008 and they think, “Oh actually, we raised interest rates too quickly after that crisis, we’re not going to make the same mistake again.” So, they’re pretty much saying that they’re going to allow bubbles, they’re going to allow stock markets to get into bubble territory. And on this occasion, they’re not that worried about the stock market crashing and that makes things a little bit dangerous in the coming months.

Nick Griffith:

And I think one of the expressions was, are we looking at dotcom boom or bust at the moment? We can obviously, we see the news what’s happening with the dotcom (technology), is there a boom or bust happening?

Austyn:

Yes, 20 years ago there was dotcom mania as the internet got going and it crashed spectacularly during 2000. There are lots of articles in the last week looking at parallels between 20 years ago and today, because we have this almost mania at the moment in these five or six large American technology companies, which seem to be sweeping the US stock market forward, but at the expense of other world’s stock markets. And the main differences are this time around, is the interest rates are much lower, interest rates are not going up, and you have massive Central Bank liquidity, not just in America, but around the world.

So, whilst there is a fear that we’re in bubble territory in terms of technology, if those three things, with interest rates and liquidity stay pretty much the same, that’s just going to allow the bubble to get bigger and bigger. The only thing I should just caveat that with, is that that doesn’t mean that technology necessarily will just keep going and going, because these things do burst eventually. But there could be a series of bubbles, boom and busts over the next couple of years. And that just makes the investment world a little bit more challenging than perhaps it was a few years ago.

Nick Griffith:

So, you’re actually saying this is a matter of when, not if, there’s going to be a crash or correction.

Austyn:

Yes, the Federal Reserve, their main criteria and in fact, Central Banks or Bank of England, they really want the real economy ( up and running ), they want people to get back to work and try and go back to normal. They’re going to keep interest rates low and that means that there’s cheap money, and companies can borrow cheaply. That can then sometimes mean that some of that money gets into the stock market and things get a bit frothy. But they ( the Fed )don’t care about that so there might be a few boom and a few busts coming. They just want the real economy to recover. So I guess, this is increasing the average risk, for the average person in their portfolio and they might not realize that.

Nick Griffith:

So, you’re saying that the risks have increased for the average investor, is that right?

Austyn:

Yes. (risk ) it’s either staying the same, or risks are going up or risks are going down. Personally, I don’t feel that risks are going down at this point in time because as bubbles develop and at the moment, it’s easy to see in technology, but we could see that there are other bubbles developing in other areas, that if you like starts to stretch the elastic band, and we just don’t know when the breaking point is. But a lot of what I’m reading and seeing suggests that we are in bubble territory and then it just becomes a little bit dangerous.

Now that bubble could last six weeks, six months or the next couple of years, no one knows because there’s so many moving parts at the moment with the pandemic but it’s just something to be aware of. And obviously, with what we do on the cautious side of things, it becomes really important to protect people’s lifetime savings.

Nick Griffith:

And what’s the danger, if danger’s the right word, what’s the risk or danger of being drawn into the technology bubble because people don’t want to miss out?

Austyn:

Yes, we’ve been through times like this before throughout my 25 years doing this. And there is this herd mentality that you’re almost forced into going along with the flow or going along with the herd. And we can do that to a degree, but we’ve just got to make sure that we still keep our cautious ethos. So for example, we’ve been in technology and we still are, but we were a bit more in technology in the summer and we took a bit of profit. You could argue, we could have let that ride.

So, you never quite know when it’s the time to take a profit. It could be that we decide to boost certain holdings in that area or in automation over the next month. And again, we’re just thinking, “Well look, we’ve got to allocate and deploy money to try and make something for clients.”

And that is the same mentality for the rest of the market as well, because the danger though, is ‘group think’, especially with the larger investment or advisory businesses, because they can just keep doing it and keep doing it, whereas, we’re a bit more ‘independent thinking’ in terms of, “Well okay, we will hold some cash at certain times and we will be a bit more low risk at certain times.”

So, the danger is I guess, is that things will perhaps get a bit more choppy as these bubbles develop. And the danger is for certain people, that could cause a dangerous event in terms of them losing money.

Nick Griffith:

It’s an interesting question to ask. So, where does this leave the investor looking at all their options, not so much where they put their money, but who are they putting their money with to be managed? Or is it trying to find a second option?

Austyn:

Well, this is it. I think tracker funds are used to keep costs down in portfolios but they do have a problem in that, they just track an index. And certain parts of the index, you might not want to be exposed to. So, banks and insurance companies might be part of an index but you might not necessarily want to be in them because that’s the sector that’s being affected badly by the things going on at the moment.

The other big bone of contention I always talk about is that managed funds aren’t managed in the way that people think they are. So typically for starters, a managed fund typically in a crisis, will fall at least 20%. And also, it tends not to have very much in cash, maybe just a few percent in cash.

And of course, that’s fine for people if they’re reasonably blase about risk and they are happy just to ride the peaks and the troughs, but most of our clients and a lot of clients that we speak to, they want a more cautious approach and they want to try and manage those risks in some way. And obviously, that’s what we try to do. So, there’s a much more personalized and human approach as compared to a large company approach where perhaps you’re just in a managed fund, where you personal goals are not taken into account. Which of course isn’t taking your background into account. It’s just taking a fund manager’s 25-year view.

And of course, that might not coincide with how long you’ve got to retire and when do you need to spend that money? So, I think it’s crucial that portfolios are put together based upon when people need the money and how they need to spend it.

Nick Griffith:

So here we are in 2020, do you think that the conventional wisdom around risks and investing has fundamentally changed in some ways?

Austyn:

I think in the mainstream, the conventional wisdom is still there, that you invest money, you take lots of risks and hopefully you get big rewards. I think it’s become a bit disjointed though, as just because you take lots of risks doesn’t mean you get big rewards at the moment. So, those scales are not functioning in the normal way. And as we get more into bubble territory in certain areas, the risks grow.

So, I think it’s important to decide where you feel you fit in, are you relatively comfortable taking lots of risks or not? And I still come across 30-year olds and 40-year olds who still want a reasonably cautious approach because life is stressful enough without all of a sudden finding you’ve lost a big chunk of your money. And that applies obviously to people in their pre-retirement phase and their post-retirement phase.

Nick Griffith:

Interesting. Going back to something discussed earlier, (how the UK pays for the stimulus) there’s a difference in attitudes between the US and the UK, where the US is quite willing to almost not worry about printing money and going on that strategy, versus the UK. Could you just explain a little bit more?

Austyn:

Yes, so we were talking earlier about in the UK press at the moment, there’s a lot of stuff about how we’re going to pay for the stimulus and perhaps that means tax rises, whereas in America, they’re not talking about that at all. They’re just talking about, “Well, we’ll do whatever it takes.” And I think that our view and perhaps the European view is that, yes, we’ve got this debt and we must pay it off as quickly as possible.

But I think this is such an odd and unusual situation and hopefully something that only happens every 100 years, that quite legitimately, they could say, “Well actually, rather than trying to pay off this debt in three to five years, we’re going to pay it off in 20 or 50 years.” And so, I don’t see that they necessarily need to rush to raise taxes. I think they’ll do a little bit of that. I’m hoping that it won’t be as bad as the press are making it out to be.

Nick Griffith:

Well, the press were obviously going for their headlines here but I guess, to summarize where we are this week on your traffic lights system, where would you say we are first week in September?

Austyn:

We are still a little bit amber and flashing amber, which is a little bit of uncertainty. And I think that’s no surprise really, but I think we’ve got an interesting and challenging couple of months globally if we see that there’s a second wave.

On the positive side, I was reading something in the New Scientist and I can’t pretend to say that I read that every week, but I came across this article that said that the Oxford vaccine trials have now begun in the US. So, the Oxford vaccine trials is in association with AstraZeneca. It’s the front-runner globally at the moment I believe , in terms of finding a vaccine.

And I was also reading that GlaxoSmithKline are tying up with a French medical company Sanofi and their vaccine, it’s very close behind. So, there’s a lot of positive stuff out there in terms of, is there going to be a vaccine by Christmas? And I’m hoping that that would be a nice Christmas present for all of us.

Nick Griffith:

Well, I think that’s a good note to end on. So, we’ll keep our fingers crossed on that one and I look forward to our next weekly catch up next Thursday. Thanks very much for speaking to me.

Austyn:

Okay. Great, Nick. Thanks. Take care.

Nick Griffith:

Take care. Thanks. Bye. Bye.

Past performance is not a guide to future performance
The value of investments can fall as well as rise
Portfolio performance varies according to client circumstances

About Austyn

Austyn Smith is a leading advocate of the ‘risk managed’ approach and ‘all weather’ investing, and has been featured as a Citywire ‘Cover Star’ in 2010, 2013 and 2017.

Following his work on risk reduction strategies, in 2011 he was recognised by Citywire Wealth Manager magazine as ‘Being in a position of some influence among your peer group, and likely to take a leading role in setting the investment agenda for UK Private Client managers.’

Austyn has recently contributed to leading publications by Citywire, and the Institute of Directors, and over the years has been quoted in the Sunday Times, Mail on Sunday, The Independent, and Bloomberg Markets.

With over 25 years financial strategy and wealth management experience, Austyn lives with his wife and children, Black Labrador and Springer, in Beaconsfield, Bucks.