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BLOG: Late cycle investing: Why cash may not be king in a market meltdown

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Written by: Darius McDermott
22/08/2019
Having experienced the longest bull market since World War II, investors could be forgiven for being wary about how much longer it can possibly last.
BLOG: Late cycle investing: Why cash may not be king in a market meltdown

After the global financial crisis in 2007/2008 stock markets fell some 40 per cent and hit rock bottom in March 2009. But since then, markets across the globe have ground their way up towards record highs in the past few years, albeit with a few bumps in the road.

But as markets have continued to rise, investors have increasingly wondered when the good times will end. And today is no different. There are fears of a no-deal Brexit, that the US-China-trade war will escalate and that global growth is slowing. Worst still, a combination of all three could be the catalyst that finally sends markets into a tailspin.

The truth is that global economic data is indeed showing signs of weakness, and the word ‘recession’ is being bandied around. Talk of being ‘late-cycle’ (a term used to describe the latter stages of economic and stock market expansion) has increased.

However, at the first sign of trouble, central banks have once again stepped in to maintain the status quo. The US Federal Reserve (Fed) has now made its first cut in interest rates for a decade, and the European Central Bank has indicated it is ready to, once again, ‘do whatever it takes’. Indeed, according to Goldman Sachs, globally, 65 per cent of central banks are on hold, with 35 per cent cutting rates and no banks hiking.

While lowering interest rates may boost economies (lower borrowing rates encourage businesses and consumers to spend, which means more goods and services are demanded) it does not mean there will be not be more significant bouts of volatility in stock markets.

So what to do?

The initial reaction to any fall in stock markets is usually to run to the hills. Investors stop investing and often take their money out. But unless you need to use your savings soon, this could be a very mistake. Anyone investing for the long term should try not to worry about what the stock market is doing on a day-to-day basis. Stock markets will fall. They will also rise. It is what they do. You just need to sit it out.

For example, the final three months of last year saw markets fall almost 14.5 per cent* to their low on Christmas Eve – a move which prompted many UK investors, who felt it was the end of the bull run, to withdraw almost £6bn of assets, according to figures from the Investment Association. This has turned out to be costly, as the MSCI AC World Index has rebounded 24.8 per cent meaning investors have since recovered their losses and made an extra 6.6 per cent gain.

In reality it can be just as dangerous to hold assets in cash for two reasons. The first is that if the level of inflation is higher than your cash savings rate it can erode the real value of your cash in the future. The second is misinterpretation of markets – for example if your investment has recently fallen 10 per cent but has previously risen 20 per cent – you may feel you’ve made a loss when the reality is you’ve made a gain.

Essentially you end up losing money by being risk averse.

This is why diversification is essential for investors and often remaining invested – and trying not to think about falling markets (sometimes easier said than done) – results in a better long-term outcome.

The main benefits of diversifying your investment portfolio are that it helps minimises your losses – if one investment performs poorly over a certain period, other investments may perform better over that same period, counteracting some of the losses.

The best way to diversify is to have a mixture of growth assets; such as equities and property, which promise higher returns but with greater risk; and defensive assets, such as fixed income, which generally provide lower returns in the long-term, but with less volatility.

Diversification can come in many forms so here are some funds to help you decide which route you want to take:

Multi-assets funds – where the managers make the asset allocation decisions for you – are one obvious option. The team at Jupiter, headed by John Chatfeild Roberts, is arguably the most popular multi-asset team in the UK and the Jupiter Merlin Income Portfolio has been a stellar performer in terms of consistency returning 97.7 per cent in the past decade. The fund currently has 50 per cent in equities and 36 per cent in fixed income holdings.

Another fund to consider is Premier Multi-Asset Monthly Income, which is led by investment director, David Hambidge, who has more than 25 years of multi-manager and multi-asset investment experience. The fund has returned 117.3 per cent in the past decade and has an attractive income of 4.8 per cent.

For those who’d prefer a diversified fund with exposure to a single asset, I would suggest going global with the likes of JOHCM Global Opportunities. The fund, managed by Ben Leyland, has historically been amongst the least volatile in the global sector.

On the fixed income side I would consider a strategic bond fund, as these vehicles can invest across different types of bond holdings depending on a managers’ outlook. I would look to the likes of the TwentyFour Dynamic Bond fund, which has a very flexible approach in order to take advantage of changes in market conditions.

Darius McDermott is managing director of FundCalibre

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