11 August 2017
No self-respecting British blogger can avoid a whinge about the weather this week so let’s just get that over and done with! “If I have to play one more game of Monopoly with the kids….” “Why do we live on this miserable island!” ….“fnaaaargh gimme a drink!” Repeat to fade….Right on with finance.
This week is more or less 10 years after the global financial crisis began. Today stock markets are at their peaks and the US market in particular has had a tremendous run despite the ascendancy of the Toupeed Tweeter. But people are nervous and we’re getting questions about “the next crash”. Let’s just take a quick re-cap of the past and then turn our thoughts to the future.
Global Financial Crisis for Dummies
Im not convinced anyone really knows what happened in full but here’s how I get my head around this. Collateralised Debt Obligations anyone? (Say what!?) Imagine I’m a big greedy bank and you all have your mortgages with HollyBank. Let’s assume an average mortgage payment of £1,500 a month. So based on our 3,000 subscribers you pay me £4.5 million every month. Some of you are reliable good payers. But others have borrowed to the max, can’t really afford your mortgages and are a bit financially dodgy. Sub-prime. But I sling you all into the same pot and somewhat cavalierly assume the £4.5 million is a pretty safe bet.
I decide to make some HollyBank certificates (backed by the slug of £4.5 million as collateral) and offer these on the market. A ratings agency which doesn’t really have a scoobies about what you lot are like gives this a decent risk rating because most of you sound OK. Mr A buys a HollyBank certificate and like any self-respecting investment banker I get some commission. Lovely. A borrower is short of cash and needs £10 today. So Mr A sells her his HollyBank certificate, she pays him £10 and promises to give Mr A £11 back at the end of August. He’ll make a quid and she gets to borrow. Happy Days.
All goes swimmingly until 300 of our subscribers can’t afford to pay their mortgages, I don’t get my monthly £4.5 million and the bottom champagne class is pulled from the pyramid as the collateral for my HollyBank certificates diminishes unexpectedly. Crash bang wallop as people try and calculate and quantify what is actually going on. No-one lends to anyone. It all dries up. We queue outside Northern Rock as the very essence of money which is nothing more than promises and trust (“I promise to pay the bearer…” and “my word is my bond”) is threatened. And BANG!
Fast forward to today
10 years on and confidence has largely recovered although we still gobble debt like kids on Haribo. The FTSE is dancing around all-time highs with a short-term slide caused by unpleasant maniacs on either side of the Pacific. One reader wrote to me this week asking what I thought “about the footsie and the next equity market crash which some people are predicting..... many of these so called sages are of course predicting the market crash for the 20th time in 5 years…” Quite.
This is a hot topic and we’re asked this A LOT. Google “market crash” and you’ll see articles have been appearing about the next crash since 2011 (during which time markets have of course gone gangbusters). But markets are high and the US looks expensive. Geopolitics look unpredictable at best, alarming at worst. A correction at some stage feels inevitable. But how to position for this?
Some investors look to defensive funds – funds which will have a decent slug in lower-risk cash or Government bonds and which will look to buy shares on any correction. If investments were people, these funds would be the ones holding back saying “Oooh it’s a bit deep/high/fast” but they won’t be the ones in A&E. Mark Dampier at broker Hargreaves Lansdown likes RIT Capital Partners, Newton Real Return, Trojan and Pyrford for their defensive funds. But he also makes the very good point that if we really believe a correction is imminent, wouldn’t a move to cash be the logical conclusion? And if we do move to cash, the main discipline most of us will lack is the guts to actually buy back in during the eye of the storm when things have fallen by 15% or 20% and the Daily Mail is screaming Meltdown! and Armageddon! (My words, not his!)
Write down your number
No-one knows what lies round the corner. All we can do is have enough of cash buffer to prevent us from being forced sellers in a downturn, and then to ride it out. If you are sitting in cash today, or thinking about re-positioning in response to sky high markets, it’s probably worth looking at the FTSE All Share or the FTSE 100 today (about 7,300) and making the decision now about what levels you would buy back in at? Write that number down.
Enforced hardcore discipline is of course one of the advantages of a defensive fund. They are run by logical money people who will buy back in whatever the headlines honk. If you are attempting the impossible and trying to time markets, well at least have a think about your disciplines now before the potential proverbial hits the fan. Me? I’m just sitting tight. I’ve learnt I make more money by doing nothing when it comes to investing and there aren’t many things where laziness is profitable! Fiddling is expensive and I don’t have a crystal ball.
We’ve added about 1,000 new subscribers over the last month. Welcome! If you’re one of them and this talk of Defensive and Footsie is making you feel weak, have a look at our Best Buy Robo advisers who will apply a soothing poultice to your sore head and take the investment pain away!