The above is a paraphrase of a translated quote from the Chinese leader talking about US sanctions. The message is beautifully simple and reflects the confidence of modern China. But what can we take from it as investors?
Education
November 2018 (m)
Going for Gold?
Rules of Thumb
The idea of rules of thumb, or even ‘old wives tales’ is something treated quite seriously by some psychologists. The suggestion is that they have come about on the basis of human experience, so insofar as they reflect maybe millions of observations over maybe thousands of years, they may have considerable merit.
One such rule of thumb for investment markets is that when people are nervous about the value of paper assets, they sell them and buy physical assets. In other words, they sell shares and buy gold, other precious metals, classic cars, Bordeaux wine “en primeur” and so on. Gold is widely recognised as an asset not closely correlated with shares in developed countries.
This is observably true, so I always checked any potentially short term market sell off against the direction of the gold price. If the latter was not moving, it was a fair bet that the sell off was ‘technical’ and just short term reaction to news flow or repositioning by major market participants.
Recently, the price of gold bullion has risen sharply, suggesting a genuine fear is abroad and people are looking to hedge out risk. Readers of my blog post a couple of weeks back will know that I believe is the true situation – market players are now accounting for multiple risks.
So buy gold then?
Well, if only that was easy. Buying funds with the word ‘gold’ in the title may well just get you an exposure to mining companies, but that is just another form of equity share grouping. Buying a gold ETF might work, but check it is one backed by actual physical gold assets. Buying actual bullion in a bonded secure vault is possible using a limited number of third party agents, but of course you have to pay fees. Or you can buy small amounts of gold in the form of sovereigns and so on – but again you will have potentially high trading costs.
Personally, because I know gold is a commodity and it has no income yield, plus potential storage and insurance costs as well as being highly volatile in value at times, I don’t ever use it as an asset class diversifier. Some very well resourced managed portfolio suppliers (7IM, for example) will use gold ETFs for diversification and that is to their credit.
Like that other commodity Bitcoin, I would see gold as an asset for those who can afford to speculate and lose a lot if things go wrong. For the average investor, it is a little too ‘quirky’ an asset to be of much use in portfolio diversification.
New “How to” article added
I have just completed an article expanding earlier comments on how to decide on selling investments to raise cash or “skim’ profits.
Doing this effectively is quite challenging, requiring objective analysis and a fight with your own psychological biases.
At this moment in time, reviewing past profits and changes in your portfolio mix are absolute housekeeping essentials. Don’t delay!
I hope the article is helpful.
Markets get real
The sharp sell off in global stock markets is no surprise to me. I have been pessimistic for some time and especially so in recent weeks. My October Watching Brief anticipated the problems that would come from rising US interest rates and better returns from medium dated US treasury stocks. Morningstar published a video yesterday saying almost exactly what I wrote at the start of he week. There is some consensus that the sell off is for genuine logical reasons, an actual change in the underlying facts, not just the need for a ‘correction’ to bank profits and so on.
October is often a month when markets get jittery and I have said to many clients when I was an adviser that I always see October and January as the two most risky months for investors. 
So, is this just volatility that can be safely sat out? It depends of course on your investment time horizon and cash flow needs. As I explain in articles elsewhere on the site, all investment planning objectives need to be assessed in terms of the need for cash flows. So, if you have not prepared for a sell off and you are going to need cash in the near term, your adviser ought to telling you to get on with selling investments that are rich with decent gains as soon as possible. If you have an adviser, give them a ring now. If you are running your own portfolio, it is time to assess the risks carefully.
Of course, I don’t believe that you should sell your whole portfolio in the hope of buying back into markets at a lower price. That sort of ‘timing’ speculation only ever works if you get lucky. Not even the best investment managers in the world can consistently sell near the top of markets and buy at the bottom. But if you do raise some cash now and don’t need to extract it for spending later, you will have some liquidity to pick up any bargains that come along if there is a real rout.
The market pendulum always swings too far at the end of the cycle, both up and down. So a swing down into a bear market will be overdone, at some future date. Then we can all look to new money making opportunities – there are not many to be found at the moment.
Profit taking (skimming/slicing) – is there a trick to it?
One of my readers has suggested an article giving general advice on when to take profits and in what sort of proportion would be useful.
This is a subject with several aspects. How do you know when you are near the top of a market? Is that even possible? What about tax? If you sell out of a good fund, where would you re-invest? Should you re-invest at all? Is the old quotation “time in the markets is better than timing the markets” (Anthony Bolton, ex Fidelity) the simple answer?
I can seek to answer these questions or at least propose a logical way of taking decisions but the topic justifies an article as opposed to just a blog post. I will add one to the “How to” area as soon as I can. It will be unrestricted.