Market Conditions
Two weeks ago we wrote to you regarding market conditions and the reasons for our current defensive view. To recommend allocating a large amount of a portfolio to cash is a difficult decision, but it is a decision and should not be viewed in isolation or lead to cash being seen as something different to other asset classes.
Cash is a weapon in our investment armoury that can be used to provide protection; just like equities when undervalued are another that can provide real long term growth. The following sections are taken from the conclusions in our document and outline why we feel this protection is prudent.
The dilemma that we face can be summarised as follows:
Investment Markets, including Fixed Interest Securities & Equities are over-valued;
They could remain overvalued for months or years;
External risks are increasing the possibility of serious set-backs for investors;
There may be little value in traditional asset allocation methods;
Moving to cash may be a drag on performance and subject to inflation risk and charges.
There is no clear winner and whilst we have two potential options the decision is very much a case of the lesser of two evils.
Option One – No Change
For investors who are willing to accept risk and have an investment time horizon of 10 years or more staying fully invested remains an option. You should consider carefully how much of a loss could I tolerate seeing? If it’s less than 15% this approach is not for you.
However, whilst our strategies are focused on capital preservation they are not completely immune from losses; staying fully invested means accepting the possibility of declines that could be double digits in the worst-case scenario. The chance of course exists that the status quo continues for months or years and growth in the value of your assets may occur.
In recent market volatility we have seen portfolios falls between 1%-2.5% dependent on risk profile compared to a fall in UK equity markets of 6% or more over the same period.
Option Two – Move a Proportion to Cash
For those less risk tolerant and with shorter time horizons we would suggest the sale of a proportion of the assets across your portfolio to create a cash “buffer” of between 30-40% depending on attitude to risk.
Following this approach, if we see continued growth you will still benefit from a rise in value of your assets, but at a reduced rate as cash returns are negligible. In the same way if a significant decline in markets occurs the potential loss in overall value will be reduced.
This strategy is appealing but is not without risks as any cash holding will still be subject to charges and the effects of inflation – unfortunately this is the price of insurance in the current climate.
We cannot place a time scale on how long funds will remain in cash if this strategy is followed – in 2007 we recommended it around 8-12 months too early and we may need to remain there for some time yet. Over time though we would hope to reallocate cash as opportunities arise; should conditions deteriorate further a proportion of cash would likely be allocated to a holding in Gold in the first instance.
On this Day
20th April 1956: Macmillan unveils premium bond scheme. The British Chancellor Harold Macmillan has unveiled plans for a new state saving scheme offering cash prizes instead of interest. The premium bond would be “something completely new for the saver in Great Britain,” he told MPs. The scheme is part of what he called his “savings budget” aimed at getting more people to save money by offering a top prize of £1,000.