Why my pension today is 100% cash?

Dry Powder = Cash. In the event of historical market sell-off. To then be reinvested.

Most people don't spend time looking at their pension investments until thoughts of retirement come knocking.

Most people don't know the largest share holdings in their pension portfolio.

Most people haven't read about the Dutch Tulip Bubble of 1637. The UK South Sea Bubble of 1720. Or perhaps, most pertinently, the Japanese Real Estate and Stock Market Bubble of 1989.

Therefore, most people are surprised on approaching retirement age that they cannot afford to retire.

That is a bitter pill to swallow after 45+ years of hard graft.

The purpose of this short article is to make sure you are not MOST PEOPLE.

A quick story...

In September 1999, I chose to study economics for my A-levels. I was fascinated by financial markets. You can blame my godfather buying me a few Eldridge Pope shares as a christening present.

Apart from that small holding of shares, I had very little savings. But I wanted to feel like I had some skin in the stock market. So I setup an account on a virtual trading website and invested the ￡100k virtual stake provided.

Over those final three months of 1999, my virtual portfolio went up to ￡121k. It briefly entered that website's top 100 leader board.

To my mind at least, I was already a professional investor and pretty good at it.

However, on 30th December 1999, the FTSE 100 index (100 largest listed companies on UK stock market) peaked at 6,930 points. On 12th March 2003, the FTSE 100 index bottomed at 3,287 points.

An overall fall of 53%.

I stopped checking my virtual portfolio, it was too painful to look at.

Winding on the clock to the summer of 2006. I'd just joined the BlackRock graduate scheme in London (world's largest asset manager).

Over the next twelve months I was able to save a little money.

I opened an ISA (UK tax efficient savings scheme) and invested those savings into a European Equity Fund (medium risk) and an Emerging Markets Equity Fund (high risk).

Equity markets were once again really buoyant.

At this point, I had an economics degree and some professional finance exams under my belt.

I should have recognised the signs, but I remained invested.

On 12th October 2007, the FTSE 100 index peaked at 6,730 points. By 3rd March 2009, the FTSE 100 index bottomed at 3,512 points.

An overall fall of 48%.

So, where do we find ourselves today?

Well, the past 12 months in financial markets have felt quite a lot like 1999 and 2007.

In fact, a few wise investors believe the past year has witnessed the tell-tale signs of bubbles forming across equities, bonds, real estate, commodities and cryptocurrencies.

Some have described this situation as the "Everything Bubble".

Up until now, central banks were prepared to support falling asset prices through quantitative easing (digital printing of money).

Then governments jumped on board with large fiscal stimulus measures (government spending) throughout Covid-19. Putting money into the bank accounts of companies and the population.

These measures helped to plaster over any cracks that emerged in financial markets.

And economists were happy with this solution, so long as it didn't lead to significant inflation (increasing prices of goods and services).

After all, consistent economic growth following the global financial crisis of 2008 was much preferred to the potential alternative: economic depression, bank runs, and widespread unemployment.

The music has just well and truly stopped.

Over the past year, the inflation rate in the US has jumped from 1.5% to 7.5%.

To put that current level into perspective, inflation was last above 7% in 1981; 40 years ago.

Significant jumps in inflation, as witnessed over the past year, do not tend to bode well for companies, financial markets, or economies.

Central banks in the developed world have a mandate to keep inflation at approximately 2% per year. They look to achieve this by controlling the short term interest rate.

If inflation rises consistently above their 2% target, they will likely act by raising short term interest rates; as the Bank of England did once more at its recent meeting (to a level of 0.5%).

Such interest rate increases tend to have a delayed effect on reducing inflation meaningfully, but an almost immediate effect on the cost of borrowing money (higher costs of servicing mortgages, loans, car financing etc).

So where's the problem?

Financial markets have risen in unison over the past 13 years off the back of supportive central banks (lowering of interest rates and digital money printing), and more recent additional spending by governments (support for businesses and the population).

Developed stock markets around the world trade at, or very close to, their all time highs. The same has been true of developed bond markets until some significant moves in the past few months.

Central banks are now in a position where they are forced to increase short term interest rates to reduce the damaging effects of high inflation (think about your recent weekly shopping bill, petrol bill, electricity & gas bill etc compared to a year ago...ouch).

Pop...pop...

You probably didn't hear it, but that was the sound of those financial bubbles starting to burst at the end of 2021.

How does this end?

It is impossible to predict where this all leads and when it might end. I believe we are still in the early stages of the sell-off but I could be wrong.

History suggests, either way, that it is better to sit on the sidelines at times like these with elevated valuations and an increasing chorus of potentially negative market catalysts.

I'm doing exactly that having sold all my liquid investments for cash holdings on 1st December 2021. I have done the same more recently with my pension investments - hence the title of this post.

I plan to start gradually reinvesting those proceeds in positively impactful funds, through Pangea Impact Investments, when mainstream news channels are consistently leading with stories of crashing financial markets.

What are your current thoughts on financial markets? How you are positioned? Are any of your investments keeping you awake at night? Have you changed your positioning recently? I'd love to hear from you.

In the meantime, I'm planning to launch a weekly newsletter on LinkedIn to provide updates on financial markets, investor wisdom, sources of inspiration, positively impactful investments, and carbon markets.

Please do FOLLOW ME here on LinkedIn to receive my newsletter which can only be more formally published once I'm up to 150 followers on this platform. Thank you.

**The content of this post should not in anyway be construed as investment advice**

#pensions

#investing

#regenerativefinance