Portfolios
US Mid term elections (m)
Do they matter for investors?
The short answer is not a great deal. Politics at a national level (as opposed to at a geo-political or international level) is usually only a risk factor for specific industry or stock sectors.
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.
Conflicting expert opinion
Yes, this is one of those times when I get as close as I ever do to those folk who issue Tweets they either wish they had thought more about, or which everyone else wishes they had thought more about. I don’t use Twitter, because I am by nature an exponent of the long way round with words, except when it comes to music lyrics.
I am going to rant a bit, but in a hopefully educational way.
Today Morningstar sent me an investor bulletin. In it they point out the useful and interesting fact that dividends grew very healthily last year in all the major global markets. Any investment professional knows that the cardinal driver of share prices is dividend growth, so that suggests share prices at what otherwise seem to be rather high levels based on macro economic and historic data might well be justified.
On the same page, they say US shares are overvalued and that it is a good idea to sell overvalued shares. In that article they go on to say that they are NOT recommending selling US shares. They also say (correctly) that you should never sell shares on the basis of news headlines. In their view tariffs won’t impact the US market as the US has a high domestic focus and is not too much impacted by international trade, so ignore that news. Might one ask why the US President is imposing tariffs in the first place if that is true?
A rational line of advice might be this: current shares prices are high because we have seen (past tense) excellent dividend growth. In a world where tariffs will have some impact on local costs (absolutely without doubt) and there is full employment and pressure on wages in many producer countries and also rising interest rates, profits will grow less, dividends will grow less or even get cut and share prices will indeed look expensive.
I am relatively pessimistic, which as I am naturally an optimist, means that for me I am very concerned about current share price valuations in many places. But there will be buying opportunities, something Morningstar does point out to give them credit. As I have been saying for some months now, holding cash patiently is a good tactic.