How to make your investments work before, during and after this coming recession.

For today’s topic, with markets in turmoil and the corona virus causing a flight out of equities and into safe haven assets such a government bonds and gold, I thought it sensible to outline how my Family Office manage investments to reduce risk and losses. 

Investing looking forward is very similar to packing a suitcase. If you are going to New York in the winter, you would look to pack a coat. If you were going in the summer, probably a few T-shirts and maybe some shorts? If it were due to thunderstorm… you would likely not make plans to go out sightseeing and would probably plan your activities around being indoors. 

Investing is very much the same. You have seasons. These seasons are called economic cycles. If you know this, you can prepare for the phases of the cycles, be it winter or summer. When you get really good, you can even tweak your investments to accommodate Spring and Autumn . The problem often is that we forget about these cycles as they are so long and when things are going well, we have a tendency to just want to ride the wave endlessly. As we well know, waves at some point tend to crash upon a shore. 

As a professional investor, my fundamental strategy involves understanding economics and the business cycles, and then allocating/buying investments accordingly. At the Family Office, we follow a cautious approach and heed the words of the legend Warren Buffett. 

Rule no 1: Never Lose money. Rule No2: Don’t forget rule No1. 

There are two notions that we believe in that defines the way we invest. First, we are, as mentioned before, Business Cycle Investors. And secondly, we deploy something known as Dynamic Asset Allocation. I briefly explain below the two concepts and describe how they guided us in our investment decisions last year (2019).

Dynamic Asset Allocation (DAA)

Being Dynamic, means you are less restricted by what you can buy/sell in your portfolio. You are able to come entirely out of any asset class if you feel that the decision is right. It is an advancement of both Strategic and Tactic Asset Allocation, used by many wealth managers who have multiple clients to manage. 

 BCI or Business Cycle Investing (BCI)

Economic theory is at the core of this approach. Economic cycles are like seasons. There are 4 and they generally take turns concurrently. 

How did this help us select investments in 2019?

Well, depending on where you believe we are in the business cycle and bearing in mind that many economies can be at differing stages of the cycle, using BCI and DAA will help dictate how you allocate. In the early and mid-stages, you would very much favor equities. In the late stages, assets that negatively correlate to equities as these historically perform better. 

At our Family Office, our investment committee believed we were entering late stage 4 of the cycle in 2019. As a result, we deployed to defensive assets. These included: 

·      Gold

·      Government Bonds 

·      Corporate Bonds 

·      Private Secured Credit  

·      Cash

These have all performed over the last 12 months well with gold returning roughly 24%, corporate bonds 7% and private credit 15%. Government bonds are now coming into their own also and cash creates a balanced to support the portfolio.

Summary 

If, like me, you believe that economic cycles occur in the same way seasons do, then preparing your portfolio for the season ahead and doing this early, is a wise and sensible route. Yes, you often can miss some returns as we did with equities in 2019, but we have just seen much of those returns wiped out. We, in fact, did a similar return over a calendar year, with far less volatility.

Going into 2021 will very much depend on how that impact of corona virus plays on the markets. I would say that gold, government bonds and cash will continue to perform well in 2020, as more and more investors will shift away from equities into these sectors. The most important thing is to book profits as they arise and not let greed take over. 

By 2022, if the economy continues evolving at this current pace, we would have seen equities heavily hit and subsequently, this would be a time to rotate back into these sectors.

I hope this provided some insight into how our family office invests.