Market crashes - what could or should you do?
Phillip 'Francis' Eccott
Between the viaducts of your dreams (Van Morrison). All aboard the Triage train??
No doubt the communications will start around now - 18% into a FTSE 100 downturn. Have you thought of topping up your share account...adding a bit more before the tax deadline etc. However where has your Fund Manager of Wealth adviser been over the last 2 weeks? Has there been radio silence?
I surveyed some Wealth Managers over the past week about what they were doing about Investor communications - some of the answers went from the sublime to the ridiculous
... our philosophy as a business avoids stock market speculation and chitchat. We are in it for the long term.
This came from a 'Wealth Manager/CEO' of an organisation that offers 'a world class investment strategy'
you can’t express any option for fear it’s construed as financial advice let alone give a view on the markets
This came from an adviser of a FTSE 100 company specializing in Wealth Management.
Where in any of this and the communications from your wealth adviser is there any commentary on risk management? The fall in the markets over the past fortnight came at the end of an 11 year bull run in Equities - a considerably lengthy period of time for any investment manager to be hesitant about taking on more, or even maintaining the risk involved with holding equities.
The wider issues
You should at least be able to understand the wider economic environment if you have Investments - through personal holdings, or a company or personal pension.
- Cheap Money
When interest rates fall it creates a marketplace where leverage is both easier to obtain and debt costs less. I don't claim to be had an eye on household finances when interest rates hit 15% and beyond in the 1980's but I was around when working for the Prudential backed Egg, which hauled in 250k NEW retail banking customers in less than 3 months by offering an interest rate on customer deposits at a rate above the Bank of England rate. The BoE rate was 5% at the time, Egg's offer was 5.5-6% depending on how you transacted with the online bank.
If you can find one and you are unaware of this find a 20/50 or a 100 year graph of interest rates. We are in an unprecedented times with interest rates being this low. And when something becomes too easy to obtain, sloppiness ensues.
Simply put shares have been too easy to buy with too few options elsewhere - the higher interest rate environment traditionally offered competitive alternatives for those looking for investment channels for their savings. Without this competition demand shifts to the Equity Market. With debt funding having little or no cost attached to it, there's scope for share values to have moved beyond their true value.
- Experts etc.
Why do people offer opinions? Because they see themselves as being above the rest of us? Because they did some exams on the subject matter they comment on (often 10 years ago or more)
I can see some reading this saying this is just an opportunist piece of writing. A sort of PhD in I told you so, when it's too late. But it's never too late to learn (for example having taken an interest in science in recent years, and shocked by what I'd found out about the Spanish Flu and it's consequences 100 years ago I posted a recommendation to this excellent tome on the subject before Xmas https://www.dhirubhai.net/posts/activity-6613444523018199041-BUK3)
3-6 months ago I started interact with the opinions of one such expert. Step forward a Mr French, Economist. This person seemed to have 2 slants that I thought were a little daft. Firstly he seemed very happy to ingratiate himself with the rest of us by the constant use of cliche's. The 'Boris Bounce' was one of his faves....the populist believe that Boris will save the day. However 3 and 10 year charts of UK GDP growth point downwards. Mr Trump had taken a calculated risk in starting a trade war with China. With all respect to Boris they are headwinds too strong to see a recovery in the UK economy from (not that Boris could fit into a Superman costume!)
However another of Mr French's slants was that sterling was overvalued. Clearly the financial markets did not like one little bit the Brexit vote. Sterling fell 10% against the US$ and 19% against Euro on the morning after the Referendum vote was announced. However usually market corrections involve some element of over correction. A bit like a pendulum swinging. This is not helped either by the prominence of algorithmic trading on the major exchanges - some estimates say that 80% of trades on NYSE take place at the behest of automated trading programs.
However back to Mr French. Attached to his LinkedIn profile was his interviews on Bloomberg TV - such as this one - promoting the opinion that recent increases in STG against Euro and $. And this opinion just didn't seem plausible to me, given the assumption and behavioral trait that there had been an overreaction of the markets to Brexit.
Mr French of course too the mature view to my comments about his views - he blocked them. However STG is up about 4% against US$ over the last 6 months and about 3% against Euro. Mr French didn't comment on (and was not asked about) the Equity Market prices that zoom in front of the interview below
A couple of final points here;
-it's worth taking interest, again even from a wider perspective, on markets at times like this. Gold rose 7% on the morning of the Brexit Referendum vote announcement. It's often a barometer of fear and risk - people tend to move money into Gold at times of uncertainty. Today and recently Gold prices are flying high once more
-'experts' can have self, peer and company interests which you don't know about. There's plenty of bulletin boards for private investors out there - however those shouting (posting) most regularly and prominently on there are often doing so from self interest. If you are an owner of shares in a company why not go onto these boards and shout out the company's prospects? Peer pressure...well if some of your closest allies, industry friends who you interact with are harping on about a certain opinion this is likely to sway our opinions. And company interests? Well 'Chinese Walls' are supposed to exist and be managed in sizable organisations who transact across a number of customers who might have conflicting positions in Financial Markets. Size sometimes does matter though.
And Bloomberg TV - they list interviews 7 market experts on their broadcasting schedule over a 2 hour period this morning (10th March). Maybe they're opinions all right?!
As an aside I'd be suspicious of Crowdfunding sites who allow companies there to post fund raising documents that allow them to avoid interacting with Shareholders post the fund raise by excluding in these documents the right to attend AGM's.
Nodding too much
The Financial Times gathered together some opinions about how people's views get clouded with too much success. In their March edition of the 'FT Wealth' magazine they refer to 'confirmation bias'...with each year of rising asset values Asset Managers can develop an overconfidence in their decision making because recent results have been good.
It's easy to forget too that Fund Managers generally earn their fees when you initially deposit funds with them and based on the total value of assets held by them - where is their incentive not to have you invest more money with them, or to constantly point out the robustness of the value of the market as a whole?
The longer the market rewards the investor, the less inclined they are to are to alter their behaviour, as the confirmation bias roots itself deeper and deeper
...says Ed Raymond, head of portfolio management for the UK at Swiss Bank Julias Baer (although it's not sure whether he considers himself to be the investor or whether he considers the client to be)
At the moment when advisers should be stewarding clients toward restraint, they are often incentivised to do the opposite
says Robert Weeber, Tiedemann Constantia chief executive
A world where Central Banks keep the cost of funding low for everyone and subsidise market stability is by definition a fragile one...market risk has risen considerably as may financial assets have reached very high valuations
says Alexandre Tavazzi, global strategist at Pictet Wealth Management
Final Comments
Firstly it's very simple for even novice private investors to put a hedge on/against their holdings - an index future for example at points of the economic cycle where risk is increasing can protect existing profits
However how do you know when risk is increasing. Reading relevant articles can't do you too much harm. And as your asset holdings become substantial ask yourself what your Wealth Manager is providing. Are they just sitting on your nestegg? Your Wealth Manager should be educators suggests the FT.
The risk discussion should be taking place constantly throughout the market cycle
in the opinion of Weeber.