Its Not Harry

Comment and opinion for retail investors in the UK

Education

Midweek Musings – will they, won’t they?

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You may guess I am referring to the US Federal Reserve’s imminent decision on US interest rates. The markets are expecting a pause in rate rises, but not the beginning of reductions. What the Fed decides will always impinge on the options open to the UK’s rate setters, because UK rates must line up with US rates if Sterling is not to depreciate: Sterling depreciation is inflationary in the UK.

UK currency pointers (rising Pound) and Gilts pricing (jump up to higher yields) suggest that markets expect the Bank of England to adjust upwards this month, thereby being more hawkish than the Fed

As we will shortly know what the decisions are, I am not going to pontificate on what we can glean about market trajectory yet. I do however still see more of a positive attitude in investor behaviour at the moment.

Scores on the doors?

To fill in for this week, I supply below anwers to some of the questions in my June 1st test! I will slowly work through all the questions. Some require longer answers than others.

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Midweek Musings – Spanish Inquisition?

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Friday is not mid-week, I know. Apologies if you were wondering why there was no post on Wednesday.

I saw this week a headline in the FT that ran: Investors Should Expect the Unexpected. How absurd.

Most readers will know why nobody expects the Spanish Inquisition. If not, ask Google, Bing or ChatGPT. It’s the meme from 1970’s BBC TV that you want, not 15th century religious history.

However in spite of the FT’s urging, investors cannot expect the unexpected, because if they did, it would have become the expected. You see the difficulty?

I can’t know what the FT wrote about this because I don’t pay their exorbitant subscription, so this is a bit of a rant (with a purpose).

Crystal ball gazing

The better point to make is that the next direction of the market is not often indicated by the easily available headline ‘facts’ or even the current pricing trend.

The ‘teenage scribblers’ are at it again!

The next inflection in a given asset market is quite often not at all unexpected to someone who carefully reads relevant news and economic, financial and trading data. Such a person will also have to understand their personal psychological biases and how to resist them.

Furthermore, taking decisions in anticipation of what is going to be called later the ‘unexpected’ , but was in fact something entirely predictable (like say the bursting of the dot com bubble) is difficult because an investor who is sufficiently thorough will always be ahead of the market and will see short term underperformance or even losses (if the foresight prompts purchases rather than sales).

Knowing what is going to happen is not so difficult, but judging the timing is more tricky.

According to the Bible, it took 40 years for the legendary Jewish prophet Jeremiah to be proved right big time. In the meantime he was pretty unpopular. I have no wish to be thrown down a well nor for my readers to wait 40 years to see that I was right all along. I do think however that one can see what the market does not want to acknowldege maybe 6 months to 2 years ahead.

Give us another example, I can hear you thinking!

I already gave one: dotcom stocks in 1999 – I had none in client portfolios built on my recommendations. Another: the collapse of gilt and fixed income prices in early 2022. For now: problems coming out of China and that region.

Those are all worries. On the plus side: current undervaluation of UK shares outside the FTSE 100.

I am not obliged to give FCA risk warnings, being a mere blogger, so will end with a biblical one instead: Beware of false prophets!

I don’t really know the future, of course. I just make an educated assessment and I am wrong at times.

Watching Brief – June 2023

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Pottering About

No result yet in the market tug of war

The market moves up and down at the moment as it reacts to conflicting data

As I started to write this month, at least one potential crisis had passed with an outcome that markets will find acceptable.  The US politicians have reached an agreement (subject to Congressional approval) on funding the US public debt for a full 2 years more.

Bad news is the fact that the war in Ukraine is building up to a critical point and we cannot know what the consequences will be.  Plus, a welter of news from China suggests that it has economic problems on a scale not anticipated and which the Chinese Communist Party (CCP) may have trouble managing.

The push me/pull you trading in markets that we have seen this year is further sustained by the news that recessions might be avoided in some developed markets (good) but that means interest rates will stay higher for longer (bad).

For once there is some genuinely good news about a major business, which will be owned by many funds popular with readers, doing exceptionally.  This is Nvidia, the tech company set to benefit hugely from the rush to invest in AI.  It is looking like another Tesla for the moment, which means it will likely end in tears, but we can hope our fund managers will ride the bandwagon and book some profits.

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Midweek Musings – the 2 most common investor errors

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Diversification – remember what that means.

All investors make mistakes, even those as famous as Warren Buffet or Terry Smith.

Purchasing investments is about applying general, sound principles that are rooted in the very essence of capitalism and diligent application of those principles and some common sense will always result in acceptable returns over the long run.

However, even though a diversified portfolio of quality funds will always make money long term (if it didn’t, capitalism would have failed too), we can all have components in our portfolios that we worry about, because they are not making money at the moment.

Furthermore, when we pick funds or shares, we are making a judgement based on logic and the data we have available. The facts can and do change or we may even have had incomplete data, or misunderstood its meaning, so we will (all of us) buy investments that are unsuitable when reviewed with that wonderful all-knowing review tool called hindsight.

I used to estimate that I would regret recommending one or two out of every ten funds I put in front of clients. Over the years, the error rate improved, but I still make mistakes now (eg backing fintech at the wrong point in the cycle).

Never forget that if a portfolio did not have any funds performing in a different way to the general market trend, by definition, it would not be diversified.

It would be unsusual, for example, for the large cap global growth funds in your portfolio to be doing well and at the same time to be raking it in on your defensive value funds. If the markets like Tesla and Netflix, they almost certainly don’t want to buy Nestle or Unilever (and vice versa). You might think that you can tactically switch between funds to be always in line with the relevant market factors and if you can do that well, I recommend that you start up your own investment blog!

Anyone out there want to let me fully retire to my slippers and hi-fi?

In reality, and I say this based on over 30 years of reviewing portfolios with investors, human nature means that nearly everyone, on scanning a list of owned funds with recent past performance numbers, will focus on the funds that are showing losses, generally without any reference to their portfolio weighting, when they were bought or what the difference is between performance over varying time periods.

Thinking about this calmly and objectively, we might be tempted into saying – ‘Oh, that’s not me – I take the long view and once I have understood why a fund is underperforming for now, I am chilled about it’.

I am sorry to say that my experience is that even if investors (and I include most IFAS in this analysis) would like to see themselves that way, almost everyone actually stresses out about the funds they own with red or negative numbers showing in their reports.

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Midweek Musings – Sell in May?

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An aside

A quick introductory comment: Some indirect feedback from subscribers makes me think that I have been making these midweek updates too long!

I am going to make them shorter for now although once a month I will write a ‘longer read’ two or three part market commentary and technical explainer.

Sell in May and go away?

All readers know this old stock exchange maxim, I am sure. I have written about it in the past and I think, without doing any actual new research, that over a very long period, it would have proved useful more often than not.

Let’s take a look at 2023 to date by checking returns on the major equity asset markets. I am ignoring fixed income as I don’t think the mantra was intended for that market!

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Midweek Musing – is tactical asset allocation worthwhile?

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What is tactical asset allocation?

To answer that question we need to start by understanding the preferred starting point of the ‘alternative’ strategic asset allocation. This is the concept of building a portfolio with a range of asset types with varying degrees of correlation so as to achieve returns in line with our objectives at an acceptable level of volatility.

Investment theory developed over many decades suggests that the ‘right’ asset mix will see returns inevitably impacted by short term systemic changes in market direction, but that the worst volatility will be smoothed out in a well designed portfolio and over the long term returns will be reasonably predictable. Because the market’s short term volatility is in effect allowed for in the model asset mix, provided no major cash flows in or out take place, the asset mix can be generally left alone.

The idea of a well diversified long term mix of equities, bonds and maybe property, commodities and cash is the foundation of all multi-asset portfolios although some narrower equity/bond mixes are promoted as low cost ‘risk controlled’ and ”buy and forget’ products by all sorts of invesment advisers from Vanguard and BlackRock with their passive index trackers to expensive wealth management firms with their model portfolio offerings.

Although I started by saying that what I am calling strategic asset allocation is the alternative to tactical asset allocation, that was really not accurate. Tactical asset allocation is an overlay, or development of strategic asset allocation.

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