Since the autumn of last year we have been taking profit and boosting cash, and this has largely allowed us to side step the worst of the stock market gyrations, which made 2018 the worst year since 2008.
As I mentioned in my ‘Protect the Downside’ update in January, if the US Federal Reserve were to ease back on raising interest rates, then we would see the potential for an uplift.
On 31/01/19 the Federal Reserve duly obliged by putting rates on hold, and signalling a patient ‘wait and see’ approach. This has allowed stock markets to recover some of what they lost at the end of last year.
However, there are a couple of reasons why we did not drip feed in February. Firstly the UK political situation has so many variables, and secondly the wider world has changed and is actually slowing down.
This is why the Fed did a complete U Turn in January, because they realised that the effects of them raising interest rates and sucking money out of the global system, had gone too far. It had caused China and Europe to go into a slow-down.
Whilst we have been focused on Brexit, Italy is on the verge of recession, Germany is not much better, and China, the engine of global growth, is slowing.
These are symptoms of a market cycle nearing its peak. ‘Mastering the Market Cycle’ by Howard Marks is a must read for anyone wanting to look into this further. Apart from being a ‘legendary investor’, he is also someone whom Warren Buffett says, “When I see memos from Howard Marks in my mail, they’re the first thing I open to read.”
Think of it this way, ten years ago, the global financial system deliberately burst a dam of cheap money which flooded into the world. Now ten years on, they are trying to put the water back into the dam ! The cycle has changed, aside from any short term ‘wait and see’ from the Fed, the broad picture is for interest rates to creep up.
This ‘Goldilocks’ balancing act of ‘just right’, rather than ‘too hot’ or ‘too cold’, is what caused the stock market falls we saw in 2018, and are just the start of more volatility, than we have recently been used to.
The ‘Law of Unintended Consequences’ is that further Fed policy errors will materialise, causing above average risk and volatility, and that whatever Brexit may bring us, a European and Chinese slowdown does not help.
The Flip-Side of Uncertainty is Opportunity
Of course stock market gyrations have been nothing new over my twenty five years advising, and via mantra’s like ‘Always Protect The Downside’, we have always leant towards a more cautious framework, where advance preparation was the most important thing.
That’s because in any crisis you can never move quickly enough, and even if you could, you should not be doing that.
Sticking to a mindset or framework is very important, however it does not have to be cast in stone, and being open minded and adaptable is all part of our ‘Cautious Blend’® ethos.
This came about from reading the first biography of Sir Richard Branson in the mid 80’s, where the life changing advice given to Sir Richard by his Father, was “Always Protect Your Downside”. (It enabled him to set up his airline by building in an option to sell back the planes.)
Optionality and adaptability is what we build into our portfolios.
Right now we are holding more cash than we are used to, but this gives us an option in the future. It gives us opportunity to deploy into uncertainty, as well as protecting confidence in the short term.
This insight came to me from reading about Warren Buffett, globally regarded as one of the best investors living today. This is one of the major things that has set him apart, and so it’s something I’ve adopted.
Like the seasons, and the principles of sowing, harvesting and storing, we have undertaken some harvesting, and we have some grain in our store, and we have also been looking at where to sow next.
I am a great believer in trends that are immutable, like we are all getting older, and we are all surviving longer, as well as the longer term trend of digitisation and simplification.
Digitisation is a form of simplification. Ten years ago you might pick a technology fund, but since the iPhone everything has a degree of technology and digitisation linked to it.
So sectors that embrace digitisation, simplification, as well as global financial and health trends are well up there on my list of ‘hardy perennials’ that may have more risk, but over the years will reap a good harvest.
So in the short term, we have strengthened our foundations, in case we have to weather a storm, but I’m very much looking to the future with optimism, as whatever uncertainties are thrown at us, things will rebalance and move on.
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 recognized 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 wealth management experience, Austyn lives with his wife and children, Black Labrador and Springer, in Beaconsfield, Bucks.