It is a very brave or a very stupid person that claims that this time it is different. History has a habit of bitting these people on the backside. My own favourite example was when Francis Fukuyama claimed in his 1992 book The End of History and the Last Man that we had reached the end of history as the world had evolved into liberal democracy. This prediction was a little premature and the world seems even to be retreating from liberal democracy at the current time.
So it is with some scepticism that we read commentary claiming we have been through a paradigm shift and that the era of low interest rates and low growth is here to stay.
It is true that interest rates have been kept low for a long time now, inflation has been low and economic growth has been low. This looks to be partially as a result of governments and central banks’ panicky response to the global financial crisis of 2007/08. The policy decision was made that money would be printed and asset prices supported to avoid a recession. The problem with this is that you can end up with a zombie economy, where companies limp on that should have gone bust and house prices and stock markets are pumped up with fake money rather than real increases in their intrinsic value.
The danger of this approach is that you can end up with a bigger problem than you originally had but just kicked down the road.
So we come to the claims that we are in a different environment of long term low interest rates and low growth. For this to be the case the implicit suggestion has to be that money continues to be pumped into the system. Unfortunately at some point you just can’t afford to continue to do this or it stops having any effect because each new pound added achieves less than the last pound added.
The problem investors face is that if you have broadly cash, shares, gilts, corporate bonds and property to invest into what decision do you make right now. Cash would have hurt your capital the most in the last decade or so, shares as we have said look expensive as does property. Normally there would be a retreat to ‘safer’ investments such as gilts and corporate bonds and indeed some investment managers have taken that approach. Some commentators though think that these two asset classes are so overbought that a crash in their price might be more severe than shares.
So what can you do?
Well firstly it is important to accept the risks, it is possible that we could move into a long term low growth environment and we may be heading for a crash. We can only say with certainty that no one knows which it will be.
We also know that timing investments doesn’t work and that not investing is also not a solution for most people.
The actions to take are:
- Know the annual growth you need (relative to inflation).
- Invest what you have surplus to your short term needs.
- Take the risk that is a balance between what you are comfortable with and what will give you the growth you need.
- Know how your investment manager is diversifying away from shares, property and fixed interest.
- Pay as little in charges as possible.
- Pay as little unnecessary tax as possible.
At Altor we track what all of our approved discretionary fund managers are doing to manage the risk of a crash in the three super asset classes of shares, fixed interest and cash. They range from high cash holdings, absolute return funds, hedge funds, commodities to all sorts of clever structures. Importantly we don’t pick one but blend these approaches together to give the best diversification we can.