This article first appeared in November 2018's issue of KCW Today.
Trying to work out what 2019 holds is not as easy job. Even if we ignore the dreaded 'B' word, attempting to digest trade wars, sky-high technology valuations and stock market wobbles is not a simple task. Where is the global economy headed? And in these new times of certain uncertainty, how can we protect ourselves from the bumps in the road ahead?
Perhaps the most effective seatbelt is diversification. But when economists on telly talk about this, it can get lost in other techno-babble and lack meaning. I think it useful to look back at the history as this core investment idea has held constant for centuries.
What’s opium got to do with tech stocks?
The Dutch East India Company was formed in 1609 to trade in the Indian Ocean and bring riches back to London. The glittering prizes included cotton, silk, spices, tea and opium. Presenting great potential riches but also almost unpalatable risks.
Imagine speaking to the owner of a ship four hundred years ago. He needs money to raise a voyage and if you back him, you get the promise of a share of the spoils when the goods are returned and sold. Sounds great. Until the ship sinks on the voyage home.
Backers of these voyagers demanded a better way to get ‘on board’. The new entity of the Dutch East India Company was organised as a ‘joint stock company’ giving passive and less involved investors the opportunity to invest small amounts and to be able to buy and sell these holdings to others. Hundreds of voyages could be backed with one single investment, removing the risk of one’s ship literally sinking.
The lessons of the 17th century hold true today.
Most of the stock market returns in 2018 have come from 5 tech firms. Amazon, Facebook, Google, Netflix and Apple. These five stocks alone have contributed about 80% of US stock market returns this year. Not even Zuckerberg’s Senate appearance could dent investors’ ardour for long.
I talk to lots of people who have bet heavily on tech stocks. Or maybe your “pension” is in fact in property. Do you buy familiar high street retail brands because the familiarity is comforting? If the answer to any of these is Yes, then are you like an investor, harbour-side in the 17th century, backing one voyage and keeping your fingers crossed that it comes home?
Meet Chicken Licken
In addition to little diversification, another key thing I see is people trying to time the market. I have had investors write to me for three years now, predicting the next crash as they sit in cash as the markets march up. These are the Chicken Lickens. What does this hesitancy mean?
By way of example, if I had kept £10,000 in cash instead of backing the FTSE100 from January 2015, waiting for the sky to fall in, I’d have about £10,300 today instead of over £13,000 after all fees.
The only thing I know about stock markets for certain is that crashes are a case of ‘when’ not ‘if’. It’s all part of the cycle. It may happen in between me writing this and this paper going to print.
Our protective body armour for this fact is having enough of cash buffer to prevent us from being forced sellers when things are in the doldrums. But if we can assemble this cash buffer, then trying to call the right time to invest is pointless. Impossible. I hold in my head the fact that stock markets have done better than cash 9 times out of 10 over any 10 year period since the East India Company was sailing the seas. Some crashes along the way as just part of the voyage.
This column is hard learnt – I rode the 2000 tech boom all the way up. Well done me! And all the way down. Not so well done me. I have tried to time the market and bought crazy mining stocks at the top and sold them at the bottom. It’s a mug’s game and I’ve learnt my lesson. No-one can predict what the future holds. Not even Nobel Prize winning economists. So we diversify. We choose some sensible funds which assemble many different investments. And we stop making like Chicken Licken.