Martin Hawes

Ma

QUEENSTOWN (WHERE I live) has hot summers and cold winters. At this time of year, you can go for days and wear not much more than shorts and T-shirt; however, in winter, you need three layers of fleece and a down jacket just to get in the firewood.

The interesting thing about this is that when you are in the middle of one season, it is almost impossible to imagine the other seasons. As I type this in full summer, with every window wide open, the very idea of fires and fleece seems unbearable – could it really ever get cold again? And yet, at a conscious level, we know that when summer is here, autumn can’t be far away . . . So I sit here in my summer uniform, but I do not throw out my fleece – I will prepare for winter, which I know will come.

There is a cycle of seasons in finance and the markets as well. I also know that whatever the current economy, it, like the climate, will change. Nothing stands still; the only economic constant is change.

Success with money comes from recognising these cycles and utilising them. These economic phases are not as regular as our season; they are much more difficult to time. However, we know that the different phases will come and that there is a cycle in all parts of finance: economic growth, interest rates, investment returns, willingness of banks to lend, property values etc. You can’t time these things as you can with the seasons (timing the seasons is fairly precise: it is January so it is hot, when it is June it will be cold). However, although there is less precision, you can be fairly sure that when a market is up, its next phase will be down.

A good example of this is interest rates. At the moment we are in a low interest rate environment. Borrowers (especially home owners) are having a ball; those who need income from their capital are in deep despair.

We know, however, that this will change and even though we do not know exactly when, at some point interest rates will start to rise. It is a fairly safe bet that in, say, three years interest rates will be higher than they are now.

As borrowers and investors we need to recognise this and start to take steps now as it is usually too late to take action when change happens – markets usually move very fast. We have to anticipate and prepare: a rise in interest rates should be no more surprising than autumn following summer.

This means that borrowers should now be gradually fixing their rates for two or three years. You will find in many cases that these fixed rates are cheaper than floating rates but, more importantly, it will give some protection when the cycle turns and interest rates rise. You will never get the precise timing for fixing and so you should fix in four or five lots over the next year. You will not get the exact bottom of the market but you will, nevertheless, lock in lower rates for the next few years.

Investors, on the other hand, should not go to the long end of the yield curve, but should instead buy bonds which are fairly short dated (perhaps only for three years). There is a temptation to buy long-dated bonds because they give better returns than short-dated ones. However, when interest rates start to rise, those who are in long-dated bonds are locked in to their original low rate and either have to put up with that or sell their bonds at a loss.

Investors always need to be counter-cyclical, doing things that the rest of the market is not doing. This is the genesis of that old saying: buy in gloom, sell in boom – ie, do the opposite of what everyone else is doing. I know that is difficult – nevertheless, it is the right thing to do.

We all have a bias towards thinking that the current situation is a permanent state of affairs. In fact, with both the climate and the economic cycle the very opposite is true. You should always plan both your wardrobe and your finances for the coming season. Martin Hawes is an authorised financial adviser and his disclosure statement is available free of charge at www.martinhawes.com. This article is of a general nature and no substitute for personalised financial advice.