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.
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”.
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?
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.