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David Stevenson: what the hell do we do with our portfolios?

David Stevenson: what the hell do we do with our portfolios?

It’s a real thrill to be writing a regular weekly column for Citywire Funds Insider. Anyone who’s read my columns in the Financial Times and MoneyWeek will know that I have an adventurous obsession with funds, exchange-traded funds (ETFs) and big topics such as asset allocation.

That means that I’m no great fan of stockpicking– I leave that to far more experienced souls such as Citywire’s very own David Kempton. In truth in the past, I’ve lost too much money on AIM and tech stocks to bother taking that risk again.

What I do want to tackle in these weekly articles is what I think is the great unspoken challenge facing us all, individual investors and their advisers alike.

What the hell do we do with our diversified portfolios in uncertain times?

Fork in the road

We are, I think, coming to a fork in the road. The great bull market of the last few years is almost certainly in what’s euphemistically called its 'late stage'. I’ll be running a regular feature called The Last Bell which will look at the various macro signals which are vigorously and variously flashing green, amber or red, but for now, one signal alone should make us wake up.

Long-dated US Treasury bonds are yielding above 3% and might head over 3.5% fairly soon. At that point for American investors, just sticking some money in what amounts to a safe investment in government bonds looks attractive. And as they take their profits from 'Faangs' and accept a nice little earner of 3.5% the rest of the world will follow.

But there’s another important plus: this is probably a great trade in the medium term. It doesn’t take a genius to realize that at some point in the next few years US interest rates will stop rising and then US bond yields will fall back again – netting those investors a tidy capital profit as their US treasury bonds rise in value again.

So, in simple terms, many tactically inclined investors, usually big institutions who have fees to justify, face what I think is an increasingly obvious choice. They can hang around for the fag end of the bull market in equities with volatility levels going up, or take the profits, sit tight and wait for the US Federal Reserve to cave in and help Trump get re-elected in a few years’ time as the US economy slows down, by cutting interest rates again.

Don't run for the hills just yet

This isn’t a 'sell it all and head to the hills/caves' argument, just a slightly sordid recognition that volatility will increase and that making money from broad trends is going to be much, much more difficult.

Might stock-picking fund managers triumph in these markets? Probably. On this theme, I’ll be running a regular column looking at Hidden Gems in the world of unit trusts, ie managers focusing on some really interesting strategies well away from the spotlight usually accorded to the big asset management groups.

More broadly I also think that different kinds of styles of investing might outperform – value over growth for instance – and I’ll look at this in more detail through my regular Style Corner column.

Back in the real world of nations and markets, I’d also expect different geographies from around the world to produce some wildly different headline numbers. On this point watch China like a hawk. My guess is that their omnipotent communist rulers will soon open up the spigots and let lending rip again.

The challenge though for investors is what to do about all this headline stuff, which usually involves awfully big macro numbers. The rational investor who reads all the academic literature and has a long-time span should probably just stop reading now. Ignore the noise and concentrate on the signal.

Are the great disruptions sparked by technology and globalization about to grind to a halt? Of course not. Will the cloud destroy everything in its wake. Yep. Will Asian consumers continue to get richer, indisputably? Will giant tech platform businesses backed by the likes of Scottish Mortgage (SMT) work out a way of making profits even after employing more regulatory types? Sure. Another regular feature in these articles will be The Lazy Long Term Investor Portfolio – an assembly of funds (mostly though not always ETFs) designed to track the big themes that matter at low cost. Call it the alternative robo portfolio for the news-challenged.

But back in the real world, this kind of platonic aloofness doesn’t necessarily work for everyone. Maybe you don’t have a 20- to 30-year time frame to ride with volatility? Alternatively, you might have a large amount of cash to invest now, and you are very sensibly nervous about getting your timing wrong? 

What I'm doing

So, for this heterogeneous bunch of anxious investors and advisers what’s the choice? Perhaps the best way of answering is to look at what I am doing now in my portfolio: sizing up hedge funds who have the mystical magical power called real alpha.

I’m also looking at asset classes such as gold that might provide some diversification benefits. Breaking all my rules, I've also been sniffing around some individual stocks, like Plus500 (PLUSP), as well as exotic funds which might provide real diversification benefits, thriving from market volatility and fear. And I’m increasing cash while thinking long and hard about buying US Treasury Bonds if they start yielding over 3.75%.

But don’t confuse my actions for any prediction of an imminent crash. If I were a gambling man I’d wager that after the S&P 500's lunge towards 2,600, it has started its ‘melt-up’ towards 2,900 again. At which point at some point in 2019 (or even 2020) we will finally come face to face with 'The Big One' when stock markets get a much-deserved kicking.

Then again, as Wilson Mizner once said, gambling is the sure way of 'getting nothing for something'. Much better to plan for the worst but be surprised if the sun stays shining. 

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