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HAMISH MCRAE: The surest strategy for wealth? Be patient

HAMISH MCRAE: The big question at this stage of the business cycle is always the same: to what extent is market turmoil a warning of disaster to come?

Where to find security? We have had another one of those scary, thunderous weeks that you get in bear markets.

There was the warning of an ‘apocalyptic’ rise in food prices from the Governor of the Bank of England. Consumer prices were up 9 percent from a year earlier and, less hyped but more frightening, the Retail Price Index was up 11.1 percent.

Stocks in the US fell further, making this the worst start to the year in roughly 80 years. And let’s not talk any more about Bitcoin being a store of value.

Be patient: To what extent is financial market turmoil a warning of looming economic disaster?

Be patient: To what extent is financial market turmoil a warning of looming economic disaster?

The big question at this stage of the economic cycle is always the same. To what extent is financial market turmoil a warning of looming economic disaster?

Not all bear markets signal an economic downturn, and let’s remember that this is a bear market in US high-tech companies, which because they are so big affects the entire US investment landscape.

It is not a bear market in the price of shares of large UK companies, since the FTSE100 index is almost squared at the beginning of the year. It’s also not a bear market in UK house prices, which are still going up.

I think three things are happening. One is that the crazy exuberance of the high-tech boom is over. Companies like Netflix will be ranked on their ability to make a profit, not grow subscribers. The actual benefit matters more than the imagined prospects.

The second (which applies to both the UK and the US) is that the free money is also gone. The experiment of near-zero interest rates (below zero in Europe) is over, and I suspect it won’t happen again in our lifetimes. And the third is that there is a general awareness that the current outbreak of disruption has large economic costs that cannot yet be quantified.

But these three negative forces will not necessarily result in a serious recession. There’s a big difference between the miserable and frightening slump in economic activity that came after the 2008 financial crisis, when unemployment soared, or even the even nastier recessions of the early ’80s and ’90s, and the par of dirty years ahead. .

So this is certainly a time to seek safety, and that’s what we’re all going to do. But this is not the time to allow ourselves to be scared, even if the Governor of the Bank of England is scared enough to use what I think is silly and inappropriate language to describe the trouble ahead. So where is the security?

Well, the first area is not about investing: how to manage a stock of wealth. It’s about income: how to guarantee the flow of resources. The answers will be different for people at different stages of life, but the point is the same. If you have a secure stream of income, you are in a secure position, regardless of what happens to your savings stock.

There have been many stories about investors, mostly young ones, who put their savings in cryptocurrencies and lost everything. That’s horrible, and I get angry when I see the ways people were lured into investing in them. But if they have solid profits, they have time to get out.

And security in savings? Cash is terrible, as it will lose 10 percent of its real value in a year. Bonds are terrible, and I’ve seen some calculations that this has been the worst start to the year for gilt (UK government bond) investors since the 1970s. The 30-year bond bull market is clearly over and it is quite possible that there is a 30-year bear market ahead. Even if that is too pessimistic, there is no safety there.

So we go back to the basics that global stocks and property have been better investments for the last 150 years than anything else. Well-managed companies produce profits and pay dividends. Property in growing economies produces rental income. And both provide some protection against inflation. I think that in the coming months it is quite likely that share prices around the world will fall even further, and it is not difficult to trust property prices either.

But the big lesson from past investment cycles is that it’s very difficult to get the timing right.

So safety is allocating risks, not selecting a single type of asset, and safety is being patient. Urging patience may not be uplifting. I’m sorry. But at a time like this I think it’s wise.


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