The other day I was reading the weekend Monevator post and reflecting on the feelings of discomfort experienced by the author due to the current falling market. The Investor has become more mindful of wealth preservation during the current downturn and is trying to work out how to feel emotionally more secure about the assets he has built up so far. What crystallised my own thoughts around this post was the statement that he maintains the belief that the market will always bounce back...and I’m thinking, sure they always have in the past, but....
I’ve been at this investing game for three decades and along the way I’ve seen many ups and downs and had more than a little success with returns as well as a fair few failures. But on the whole, the past decade has been good with an average annualised return of around 9% each year. Last year saw the first negative return for my portdfolio -6% and the current YTD is -12% but could well end up lower. But prior to that there were two really good years... 22% in 2019 and 44% in 2020.
My basic philosophy has always been to buy and hold long term and also to take advantage of market falls to pick up bargains at knock-down prices. This was especially lucrative during the sell-off of 2008/09. We now have another bear market with the S&P falling back over 20% year-to-date...the worst half-year drop EVER (link) The Irrelevant Investor is convinced that the markets will bounce back.
However, this period feels different and I have not been tempted to dip in to pick up ‘bargains’. There are so many negative forces in play that I am not convinced the markets will be seeing a bounce back anytime soon.
Negative Forces
We have increaing geopolitical tensions - obviously the invasion of Ukraine which could play out for another year or more. How will Putin respond to Finland and Sweden joining NATO? But also the tensions between the US and China over trade and the situation over Taiwan.
Then we have rapidly rising global inflation combined with record debt levels - highest since the end of WW2 - which will put a damper on economic activity and deter new investment.
The cost of living crisis is obviously a concern for millions of ordinary people woried about rising energy and food bills and the sudden reduction in disposable income. The UK energy cap is forecast to rise to over £3,300 by the end of the year...that’s a third of the state pension.
Last, but by far the biggest and most serious negative in my opinion, is the climate crisis and biodiversity loss. Governments seem unwilling or unable to get to grips with this issue and take co-ordinated global action to reduce carbon emissions.
If governments were serious about addressing the climate crisis, they would eliminate subsidies to the fossil fuel industry and create a more level playing field for renewable energy. Unfortunately, according to the IEA report for 2021, we subsidised the fossil fuels to the tune of $440bn last year, almost back to 2018 levels. Fossil fuels account for 75% of the emissions which are responsible for global warming.
It’s almost a year since the IPCC published their ‘Code Red for Humanity’ report showing how close we are to a multi-faceted global catastrophe as a result of climate breakdown. Unfortunately there has been little progress over the past year and the warming continues...we are on the brink and the global economy will not be immune from the consequences. The UN Secretary General said “The climate crisis poses enormous financial risk to investment managers, asset owners and businesses”.
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What Action to Take?
In the face of all these negatives, it would be easy to dismiss the emotional response and just keep doing what I’ve been doing for the past 30-odd years. We’re in a bear market, they come around every 10 or 12 years...ride out the storm and wait for the markets to bounce back...they always do - don’t they?
This time though it does feel more serious and things could get much worse and I don’t hold a lot of confidence in a bounce back any time soon.
So, I believe the best course of action is to start to de-risk the portfolio and to reduce a large proportion of the more risky equities.
After all, what’s the point in analysing a situation but then taking no action to mitigate the fallout should that analysis prove to be accurate?
Conclusion
I like investing, it’s something I can do quite well and along the way I have been relatively successful. After so many years I’m reluctant to stop. But it’s not something I am addicted to...if I decide to move on to other things, I’m not going to experience withdrawal symptoms.
My fears may be overdone, but at the end of the day, the reality remains that I don’t actually need to carry on investing - I don’t need to generate more income or capital gains - I have my home, I have a guaranteed income from my pension and certainly enough for my modest needs.
The future risks of staying in the equity market seem to have increased significantly in recent months. So for me, in a very uncertain market, it makes perfect sense to move to cash, even though the returns will be eroded by high inflation.
I’ve had a good run over the years, but I’m not greedy for even more so now feels like the right time to lock in some of the gains. I’ve made a start in the past few days with the sale of some equity holdings but will probably hang on to the renewable energy trusts, government bonds and defensives for the time being.
As always, feel free to share any feedback or thoughts generally in the comments below.
Hi Diy
ReplyDeleteNice right up. However, might one of the reasons for you not being tempted to pick up any 'bargains' be that back in 2008/09, you were still working and thus accumulating but now you are decumulating, so a different strategy for your portfolio?
Hi weenie,
DeleteNo, I actually finished paid work in early 2008 and decided to see if I could survive on the income from my investments and bridge the 10 year gap to state pension. I was lucky...it worked!
If I had to do the same again over the coming decade I'm not so confident - seems everything is not so resilient as it was even just 10 years ago. But I seem to have developed a case of climate anxiety so maybe my better judgment is impaired!
It's somewhat funny, how you cite increasing energy costs as a problem. And in the next paragraph the subsidies to (fossil) energy are a problem. I know what you mean, but it's still funny to read it the way it's written.
ReplyDeleteYes agreed and maybe I should have been more clear.
DeleteThe subsidies are a big problem because they incentivise the oil, gas and coal industries which makes the climate crisis worse.
The cost of living crisis and especially energy bills will make it very difficult for millions of people - especially poorer households who typically spend a much larger proportion of their income on energy and food. Clearly millions of people with less disposable income is a big problem for the traditional economy.
I have not yet heard one coherent statement from any of the leadership candidates on how they will deal with this - all they seem to care about is cutting taxes.
This doesn't contradict anything you've written above, but just to be clear I am still 70%+ invested in equities (not including property assets, emergency fund and so on). I am more interested in wealth preservation as you note, but equally still looking for (and expecting) more gains over the medium to long-term. Also as markets fall they do get more interesting to me, not less so... ;)
ReplyDeleteAs for the leadership race, yes as the euphoria (for me) of Johnson getting kicked out fades I am having to come to terms with the flimsiness or problematic nature of the other candidates. Sunak does seem to be the only one speaking realistically about the economy, albeit that's his central strategy. Even others who I prefer (less tainted by BJ) such as Penny and Tom are preaching to the party voters.
In any event I'm glad you are seeing through their bluster about tax cuts and their dismissing of climate change (none attended Sir Patrick Vallance's big presentation a few days ago). Perhaps one day your position will move further and we'll agree more than disagree about how they conjured up fairy tales re: the B word. ;)
Have a great weekend, good luck finding the right balance in your portfolio!
Yes, I was disappointed to see less than 10% of MPs bothered to attend the briefing and, as you say, none of the candidates but I guess they were preoccupied with other more important matters!
DeleteTom seems like a reasonable chap but will probably be the next to be eliminated. If Penny can make it to the final two she would be favourite to become PM. But whoever comes through, they have a huge agenda of very pressing issues...inflation, the cost of living crisis - which is basically a gas crisis which will be resolved by a swifter move to cheaper renewables, spiralling wage demands/strikes, mounting debt and higher interest.
Then we see forecasts of 40C and a red warning from the Met Office so the pressures from the neglect of tackling this climate crisis continue to build.
I cannot feel optimism about the markets but likewise, I wish you good luck with your portfolio and hope that my analysis is proved wrong.
I found myself 100% in cash just prior to the start of the pandemic, thanks to a fortuitous pension transfer, but was too slow and missed the opportunity to get back in at lower prices. Procrastinated further and still in cash even now and finding it difficult to convince myself to buy anything in the current environment. Keeping a watchful eye on the S&P 500.
ReplyDelete