Seek security in a changing

What impact does the “big picture” have on your investments, and should you worry? By Anthony Harrington

ONE of the great luxuries of investing for the long term is you can “look through” all the sudden squalls and headwinds in the markets, confident that you are investing for a decade or so ahead, when today’s shock headlines will be long forgotten. The big flaw, in this argument, of course is that markets can crash and burn not just for the short term, but for years.

For example, at its absolute peak on December 29 1989, the Japanese Nikkei 225 index hit an intra-day high of 38,957. At the time of writing, the Nikkei was enjoying a pretty good run on the back of prime minister Shinzo Abe’s commitment to stimulate the Japanese economy, but was still only around 14,157. In other words, it was still not even halfway back to that awesome peak, despite the passage of the best part of two and a half decades. That’s a long time to wait to get half your money back.

The big picture is that the world is undergoing a massive shift in economic power from west to east. There are no precedents on which to draw. Much the same could be said for the degree of global interconnectedness that now characterises international trade.

One can point to a clear example of how much uncertainty this can generate by the reaction to the US Federal Reserve’s announcement on September 18, which completely wrongfooted the markets. Everyone had been expecting Federal Reserve chairman Ben Bernanke to announce that the Fed was going to begin to reduce “quantitative easing” (basically, pumping new dollars into the US economy, which pumped up the stock market).

Instead Bernanke announced that the economic indicators in the USA were not yet strong enough and that QE would continue unchanged. Instantly, currencies in a number of emerging markets, which had been crashing from the moment back in May when Bernanke first let it be known that the Fed was thinking of “tapering” QE, rebounded. The US dollar, which had been strengthening, weakened considerably, and the US stock market – and stocks generally around the world – bounced (a kind of “Yay, we get more QE!” effect). And all of this happened on the word of a single US functionary.

Ugo Lancioni, co-manager of Neuberger Berman’s Global Bond Fund, made a very similar point about market uncertainty during the course of being interviewed in relation to currency trading rather than stocks.

He said: “The problem with having high conviction views in the FX (foreign exchange) market today is that the central banks are still very much in the driving seat. Their actions are not substantially inconsistent with developments on the macroeconomic front, but at times the market interpretation of their guidance could lead to extreme price action. They (central bankers) try to arrest or intervene when they feel market forces are not moving in their expected direction. However, the market is driven by supply and demand, and when investors dump out of one country’s securities and shift to another’s, the effect is significant despite what central banks want.”

That is the nub of the problem. Taken on a global scale vast amounts of money are washing into and out of various economies and between stocks and bonds, with the whole system just about staying in whack thanks to wholesale manipulation by politicians and central bankers, who do not really have their hands very firmly on any levers that matter.

Squalls, in other words, are likely to come from any quarter and to create waves that really do demand investors sit up and pay attention to threats to their wealth and savings. The days of “buy and forget” are long gone.

The only solution, it seems is active management. But the rub here is that you do not want to “get active” by chasing into the market to climb aboard the latest fad, or rushing to sell at the worst possible time, prodded by the latest scare story. Mum and dad investors (which covers most of us) are notorious for buying high and selling low, which is a sure road to ruin. The reason is simple.

By the time the retail investor gets wind of what is going on, the smart money has already moved in or moved out. So you need to take advice from a professional, and you need to hold that professional advisor to account, not daily, but at some regular point, such as quarterly. And if they are not performing you need to take a decision, either to give them more time, or to find another advisor.

It is your money, so manage the people who are managing it. Do not fall asleep at the wheel and expect all will be well at retirement time. It might, but you’d need to be lucky.