Category: Investment Basics

I’m not your financial adviser but…

How are people getting their financial advice these days? After 3 years pretty much at home during covid I’m wondering how it all works now. You used to have some bloke at the pub giving you stock tips, now it’s all on Twitter? When I first started in the business I used to call up guys at investment banks who knew way more about finance than me and try to blag them into meeting me. Are people still doing that? Maybe you just dance on TikTok these days?

I don’t have as much time to write this blog as I used to, so I apologise for the big gap between posts. (I wasn’t exactly prolific before, I know) However, if you only have time to write once in a while it does sharpen you up somewhat. So let’s get to the point.

I’m not your financial adviser, but you really need to get things organised. I sound like your dad, don’t I? What are you going to do with your life??? Let’s try and boil it down to the basics. Where are we and what should you be doing?

As WBC’s go, I enjoyed the World Baseball Classic much more than I’m enjoying the World Banking Crisis, but at least we are learning some stuff. The US treasury backstopped the banks. That means everyone else is going to have to backstop their banks or all the money is going to flow to the US as the least risky jurisdiction. Liquidity bottomed in October. If you don’t know what that means, listen to this podcast. The stock market bottomed around then too. Inflation is unlikely to just go away, but the Fed has raised rates about as high as they can go. Maybe another 25 bps in May but that’s about it. That doesn’t mean they will start cutting. We could sit around the 5.25% mark for the rest of the year.

Whichever way you slice it, it doesn’t look good for the yen. I discussed that here. If you are holding yen and not planning to spend yen in the future then you need to seriously consider your options. Drop your phone number in the comments and I will happily call up and shout at you like your dad.

So what should you do? Well, I may have mentioned this before, but you need to figure out your base currency and have a diversified portfolio. Diversified means cash, bonds, equities, property, commodities and alternatives, allocated according to your risk profile. If you are smart, you will want to spice it up a little by taking a core/satellite approach. 70-80% goes into the diversified portfolio, that’s the core. The other 20-30% goes into satellites. The satellites you want to own in this environment are gold and bitcoin. If you think bitcoin is silly then just buy gold. Gold mining stocks are a leveraged play on gold – maybe toss some of those in too. Ideally, your diversified portfolio should be rebalanced once a year so it doesn’t grow three heads and deviate from your risk profile. Clear?

You can either:

  1. Do this yourself
  2. Get someone to help you to do it
  3. Pay an asset manager to do it for you (except maybe the bitcoin part)

Any combination of the above is fine. There’s no shame in wanting to spend your time doing other things and paying someone competent to take care of this for you. Just be aware that for number 3, you will probably need to work with a financial adviser to find the right product and not all financial advisers are the same. Some may not have your best interests at heart.

And that’s it – what was that, like a 3-minute read? I hope the weather forecast is wrong and it doesn’t rain all through cherry blossom season so you can get out and enjoy it. I’m not really going to call you up, but ask me anything, any time. Until next time!

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

Japan – Is a Cost of Living Crisis Looming?

Inflation, inflation, inflation. If you have been reading the financial news, or even just the regular news, you will have heard a lot about the rise in the cost of goods and services this year. From the US to Europe, politicians have been desperately trying to shift the blame for the crisis away from their own central bank’s unprecedented money printing to the President of Russia. Whether they get away with such misdirection is yet to be seen, but President Putin himself is having none of it, as you can tell from this excerpt from one of his speeches.

Putin, while clearly not deserving of support, is absolutely right that Europe and the US have created this mess for themselves, and there is no doubt that he is now exploiting this weakness by regulating the flow of gas into Europe, making for a very uncomfortable winter ahead for Germany in particular, and the rest of Europe and the UK also. I didn’t realise until I read this BBC article that “A younger Vladimir Putin did his PhD thesis on the importance of Russian energy exports.” The Germans should have seen this coming a long way out. Having pumped up the money supply, and also made themselves dependent on cheap Russian energy, the EU and UK leadership have some gall to refer to the current situation as a “cost of living” crisis…

However, the goal of this post is not to discuss geopolitics. As a resident of Japan, I am interested in knowing if the inflation monster is lurking in Tokyo Bay, ready to go Godzilla on the Japanese consumer? As fellow Japan residents are well aware, Japan has not seen inflation in decades, and, as noted in Japan Mortgages – Fixed or Floating?, Bank of Japan boss Kuroda-san threw everything but the kitchen sink at the problem in order to reach the magic 2% mark. Now, with inflation at 2.5%, the yen at 25-year lows against the dollar, and the rest of the world facing a food and energy crisis, you can’t help wondering if prices aren’t going much much higher.

Of course, when it comes to the big questions of economics, the only correct answer is that no one knows. Financial journalists and macro gurus generally have a bleak outlook for Japan. With the US Federal Reserve still intent on raising rates to fight inflation there, the yen looks anything but safe at the 140 level, and a weaker yen could mean higher imported inflation. Another spike in energy prices due to the Russia / Ukraine situation and things could get expensive quickly.

Interestingly though, there is an optimist in our midst. Jesper Koll, according to his profile, is an economist, strategist, angel investor, patron, producer, and yes, a Japan optimist. A resident of Japan since 1986, and with experience at two major US investment banks, he has a new substack titled, of course, Japan Optimist. And it was there I found his July post titled: Who’s afraid of inflation? Not Japan

I encourage you to read the post yourself, but here’s a short summary:

There are two reasons that Japan is less impacted by inflation than other developed countries, for example, the United States:

  1. The government here is not afraid to intervene in markets to preserve the purchasing power of the people. About one-quarter of goods and services are subject to government regulation, which effectively means price controls. This goes for health care, education, transport, and staple foods. This year surging gasoline prices have been kept under control by government intervention
  2. At the same time, Japan’s domestic industrial structure is much more cut-throat competitive. In the US, the big players control twice as large a share of the manufacturing and service industries. Japan is more fragmented and competitive, and that competition keeps prices low.

Jesper notes that the Japanese government not only considers it important to protect citizens from economic shocks, but it also has the necessary parliamentary majority to act far more quickly than the US government is able to. So unlike in the US, where the Federal Reserve is having to fight inflation on its own, the Bank of Japan gets plenty of backing from the government.

Japan’s government and economic system comes in for so much bashing in the media that it’s almost shocking to hear from someone as positive as Jesper. And once more I’ll remind you that no one really knows how the global inflation issue will play out, here or abroad. However, the lack of polarization over every issue certainly puts Japan in a better position to take action than much of the western world.

From a financial planning perspective, inflation is something you should always be concerned about. I would argue that the whole point of investing is to at least keep pace with, and preferably outperform, the rise in the cost of goods and services over time. To put it another way, it’s all about preserving and increasing spending power. Remember, it’s not the cost of things that is going up, it’s the value of money that is going down. At the risk of sounding like a broken record, beating inflation in your base currency is the name of the game. Whether inflation in Japan gets worse or not, if you are going to spend the money in Australia, saving and investing in JPY does not really help you.

If you are planning to stay in Japan long term and JPY is your base currency, here are a few things you can do to protect yourself against inflation:

  1. Keep an emergency cash reserve – make sure you have a buffer in case prices increase more than expected.
  2. Invest – anything surplus to your cash reserve can be invested for the medium to long term, whether it’s NISA, iDeCo, a brokerage account, ETFs, dividend stocks, REITS, gold. You are not going to preserve your spending power sitting in JPY cash.
  3. Expect volatility – you need to be mentally prepared that your investments are unlikely to just go up in a straight line in this environment. Remember you are trying to beat inflation over time, not in the next 6 months.

Finally, if you enjoyed a bit of optimism for a change I recommend checking out Human Progress. Their Twitter account is here. With all the doom-scrolling it’s sometimes nice to be reminded how much progress we have made as a species!

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

Embracing Volatility – How to Buy Low and Sell High

It was not even a month ago that I wrote a 2022 Investment Outlook predicting there was some volatility coming our way, and following the US Federal Reserve’s commitment to tackle inflation, the markets did not disappoint. The S&P 500 is down some 10% from its peak, the NASDAQ 15%, and Bitcoin, being Bitcoin, dumped over 50% in a matter of weeks. Welcome to 2022!

The last time I heard the term “indiscriminate selling” was March 2020, as stock markets were actually being closed early for falling to their limits for several days running. Risk happened fast as investors dumped everything: stocks, bonds, gold, crypto, you name it. Everything went to cash. There wasn’t a lot of thinking going on, just a mad rush for the exits.

We haven’t reached that level of panic so far this year, but in the US the steady pulse of easy monetary policy is fading, and as I write this the Nikkei 225 index is down over 3% on the day. There is clearly more volatility to come. So how do you invest in this environment? Selling indiscriminately along with the herd is clearly not the smart way.

As usual the strategy needs to be broken down into core and satellite. The core being the 70-80% of your portfolio that is broadly diversified, and satellite being the 20-30% you may have in something a little more sexy.

Core holdings – I have already written about how to buy low and sell high in your core allocation here. In short, you establish a strategic asset allocation that meets your risk profile and then rebalance it once per year. The rebalance in effect sells part of holdings that have gone up in value and reallocates them to the holdings that have gone down. That’s it, no further action required!

Satellite Holdings – Now for the fun part. Satellite holdings are generally invested in assets that add a little more spice to your overall portfolio. They usually have a higher risk / return profile and may change over time depending on market conditions and what is hot. So they could include an allocation to smaller companies, emerging markets, emerging technology, commodities, private equity, and of course crypto. I would note here that for someone who is retired, satellite holdings may actually be lower risk, alternative income-focussed assets, but for today we are talking about the racy stuff!

Higher risk plays tend to exhibit bigger swings, and are therefore more tempting to try and time the entry / exit. So, the first thing you need to do is make an honest assessment of your temperament and ability to manage more risk. I’m no trader and I know it, but I do have the stomach for volatility for part of my portfolio.

Scale in / Scale out: The simplest way to buy something volatile is a little at a time. Dollar cost averaging is probably the most effective way to do this. Buy a little every week, every month, or every quarter until you build your position into the size you want. As you get better at this you will learn to add a little more in months when the asset is cheap, and a little less when it is more expensive. Looking back at the chart above, it’s clear that the panic of March 2020 was a golden opportunity to acquire risk assets, but it takes some guts to be buying when everyone else is selling. That said, buying the asset is generally easier than selling it, and you don’t make money until you sell! Waiting for that perfect top is a recipe for disaster for all but the best market-timers. You need to set yourself a target price, and be prepared to adjust it if conditions change. Once you reach your target, sell half. If you think it might have more to run, don’t get too carried away. Average back out of the asset little by little, the same way you got in. You may end up feeling like you left some money on the table, but that money doesn’t exist if you go over the precipice and tumble down the other side.

If the asset is traded on an open market, learn how to set a stop loss. If it’s trading above your target price and you have already sold half, you can set the stop loss at your target price to make sure you get out if the market takes a turn.

All of this sounds great in practice, but I have personally screwed up trying to time markets more often than I have got it right. This is why position size is important. If you are in something volatile like bitcoin, which frequently dumps 50% just when you think it’s going to the moon, you are going to get it wrong sometimes. You shouldn’t have half your net worth in there! I would also say that you should be invested in assets that, although they may be hot at the moment, you don’t mind holding for the next 10 years. It takes a lot of pressure off if you get stuck in something you understand and believe in during a bear market.

Cutting your losers quickly is good advice, but many people struggle with it as they get attached to the trade and don’t want to lose money. If it’s an asset you believe has great long term prospects, then you can ride out a few bumps in the road, but if the fundamentals change and you realise you were wrong, it’s time to take the hit. Psychologically, people are conditioned to try to be right all the time, but it simply isn’t possible in investing. Accept that you will be wrong sometimes and move on.

Experience is, of course, the best teacher. Keep your positions small enough that you can learn from your mistakes without blowing up your balance sheet. Keep an eye on what smart people are doing, but make your own assessment before entering something risky. One thing you can be sure of: taking a little risk helps you to get to know yourself better!

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

Diversification the Ray Dalio Way

I recently listened to this excellent podcast with investor Ray Dalio and it once again struck me how, out of all the “investment gurus”, Dalio really preaches simple, actionable investing that us regular people can easily understand and implement.

Dalio has just published a new book, which I haven’t read yet, but contains some eye-opening assessments of the decline of the United States, (30% probability of civil war in the next 10 years) and the rise of China. However, it’s the part covering how to invest in this turbulent environment that really caught my attention. Dalio sees the world economy approaching the end of a major cycle that could have dramatic repercussions for risk assets.

Here are some of the key points from the interview:

  • Don’t judge your wealth in nominal terms – i.e. how many dollars or yen you have. Judge it in terms of buying power. The ballooning of central bank debt has pumped up risk assets so people are feeling rich at the moment. However in real terms, inflation is eating away at your wealth.
  • Cash and bonds are a terrible investment in this inflationary environment. Both have negative real returns now, when measured against inflation.
  • Diversification is key. A diversified portfolio of assets should include inflation indexed bonds, stocks, and gold. Take a look at Dalio’s All Weather allocation to understand what a diversified portfolio should look like in an inflationary environment.
  • Don’t try to time the market yourself – that’s an extremely competitive game that even the pros struggle with.
  • Look for balance in your portfolio and make sure that once a year you rebalance back to your original weighting, effectively selling a portion of the assets that went up and investing them into the parts that went down.
  • Dalio is neither a raging bull or bear on Bitcoin and digital assets. He is impressed that Bitcoin has stayed around this long and been adopted so widely, and that means that some of the initial risks of hacking or replacement by a better asset have diminished. However there are risks that money in Bitcoin could flow to something else, and of course regulatory issues as the threat of a better (non-inflationary) currency is a perceived as a risk by governments who have outlawed gold and silver in the past. In all he says an allocation of 1-2% of your total portfolio to Bitcoin is about right.
  • Dalio also makes a great observation on the value of stock indexes, whereby all companies die at some point, but the index is refreshed as the old companies exit and new ones come in, so you don’t have to have your finger on the pulse continually. Simply buy the index and relax.

Just picking up on an important point here: Dalio talks about the negative returns on traditional government bonds, and suggests investing in inflation indexed bonds instead. These are often referred to as TIPS (Treasury Inflation Protected Securities) and seeing as some people may not know what they are here is the Investopedia definition. You are going to struggle to find these in a Japan-based account, but if you have a US account then the TIP ETF is a great way to get exposure. ITPS works for European accounts.

From my experience, I find that people who organise their own investments are often under-diversified. When you boil it down they are largely invested in global / US stock ETFs which all have a high concentration in the same major companies (mostly big tech). In the good times this allocation will perform perfectly well, but there is little protection there when markets take a turn for the worse. So if you are conducting your annual portfolio review as 2022 gets going, it would be a good time to consider if you are really properly diversified.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

The Inflation vs. Deflation Debate

https://www.in2013dollars.com/japan/inflation

Inflation has been on a lot of investor’s minds recently. Every time the Federal Reserve’s Jay Powell speaks he us under intense pressure to clarify his expectations for inflation, and how the US central bank would react to it. Amidst the ongoing re-opening of America, and indeed much of the world, inflation seems to be the one thing that could derail the stock market. The massive stimulus following the 2008 Global Financial Crisis was just in the process of being tapered when Covid-19 hit, and since then we have seen some $10 trillion in government stimulus globally. That’s already triple the total stimulus for the 2008-2009 recession. When national debts and the supply of money are increased at this rate, there is always going to be an effect on the value of money somewhere down the line.

Inflation can be defined as the rise in the cost of goods and services over time, but a better way to understand it is the decline of purchasing power of a given currency over time. Simply put, the same money buys you less and less.

I came across this site, which is a great tool for understanding inflation. Take a look at the Japan Inflation Calculator and you can clearly see how brutal the effect of inflation has been on purchasing power here. 1 yen today is only worth 19% of a yen 60 years ago. And that is in a county that has been battling deflation for the last 30 years…

Japan’s example is a precursor to the ongoing debate as to whether the current scenario is inflationary or deflationary.

I recommend reading this excellent thread by Raoul Pal. Here’s an excerpt:

“In fact with global debts of all forms between $400 trillion net and $1.2 quadrillion gross – the collateral (assets) can NOT be allowed to fall or the system is wiped out. and so the merry game of systematic bailout MUST continue….”

What Raoul describes here will sound familiar to anyone who has been in Japan for a long time: interest rates held at zero and unable to rise, never-ending stimulus, wages stagnant. Official inflation is somehow measured at zero, but every year your money buys you less. What investors in many parts of Europe are facing is not only the devaluation of the currency, but also negative interest rates. Yes, for amounts over €100,000 depositors are paying up to 0.5% per year to keep their money in the bank. Imagine if that was implemented in Japan!

Raoul’s conclusion is that regardless of whether you sit in the inflation or deflation camp, the result is the same: the value of money is falling.

So where does that leave us? If we are working hard, earning as much as possible and trying to plan for our future, what should we be doing?

First of all, if your money is in cash, you are losing purchasing power year on year. If you want to escape this and maintain the value of your hard-earned money you need to invest. I don’t know any other way around this problem, other than making more money, which is great if you have a way to do so.

“Invest wisely. Bonds might be a one year trade but over 5 years you WILL lose. Most equities just allow you to stand still. Tech does better. Crypto much better. Real Estate is a stand still too (except super limited supply). The rarer the asset, the more it rises.“

I don’t disagree with Raoul’s quote above, however for a typical investor allocating to just crypto and tech stocks involves taking on way too much risk. Regardless of how each asset will perform over the next 5 years, diversification is the only way to protect yourself, whilst staying invested. I have covered the basics in numerous other posts: understand your risk profile, figure out your base currency, study up on asset allocation (also here), and, most importantly, take action! Sitting in cash is not a safe strategy over the longer term.

(This post on Japan inflation may be useful too)

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

Online Coaching – Perfect Timing

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I hope everyone is safe and well in these difficult times. One thing you are probably doing is spending a lot more time at home. And with that comes a lot more time online, particularly using internet communication tools like Skype and Zoom.

You may have noticed that I offer personal finance coaching. This also includes online coaching, which was initially meant for people living outside the Kanto area, but is fast becoming the norm in these times of social distancing.

Now would be a great time to get your finances in order and take advantage of one of the best opportunities to invest you will see in years. Below is the 25 year chart of the S&P 500. You can see quite clearly the benefit of investing during severe market downturns in 2000 and 2008. Why not make use of the extra bandwidth you have and put some money to work for you?

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Source: https://tradingeconomics.com/

Among other things, I can help you figure out:

  • How much you have available to invest and how much you should be keeping in cash for emergencies.
  • What currency is best for you.
  • What kind of account would be right for you.
  • How to allocate when you get the account.
  • How to maintain your investments over the long run.

More information, including rates, is available here. If you would like to book a coaching session, or you have some questions before getting started, please get in touch with me via the Contact Form.

Corona Correction

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Wash your hands, don’t touch your face, and there’s plenty of toilet paper!

When panic sets in, it’s good to take a step back and focus on the simple things you can do, rather than joining the stampede for the exit. And panic certainly set in last week in global stock markets. You may remember that a correction is defined as a 10% decline in market value. The one last week was one of the fastest ever, and the drop is now approaching 15%. 20% is bear market territory.

Furthermore, it wasn’t just stocks that fell. The 3%+ fall in the gold price on Friday (likely profit taking) shows that being well diversified means having more than one defensive strategy in your portfolio. Even truly diversified portfolios were down between 3% and 8% from their highs last week, depending on risk profile.

Clearly we don’t know where we are heading now in terms of the spread of Covid-19. It seems likely we will see a significant increase in cases worldwide over the next few weeks. However, it is interesting to note that in China, where the virus originated, infection rates are slowing and business is slowly starting to resume. With luck, the rest of the world will follow a similar pattern. If it does, then more market panic followed by a quick recovery is not an unreasonable expectation, particularly as central banks are likely to respond with further easing.

So what should we be doing? I’m certainly not offering trading advice at a time like this but there are certain common sense actions worth considering:

  • If you were already well diversified, relax. You were setup correctly and have done the best you can. Perhaps look at rebalancing when the panic dies down.
  • Same if you are investing monthly and averaging into the market. You get to buy cheaper this month!
  • If you were heavily invested in stocks, how much have you really “lost”? The S&P was near all time highs before last week, so a pullback would not have been out of the ordinary, even without the Covid-19 panic. If you invested capital recently your timing was not good, but do you want to sell into the panic and book the loss? Learn your lesson and move on.
  • If you are looking at the current drop as a buying opportunity, good for you. Get your capital into position – if it’s just a simple domestic transfer to your investment account then no problem. If you have to send money overseas it may take a little longer to organise.
  • Even pros will struggle to call the bottom. Let the panic subside and buy slowly. Maybe allocate a little each week. Markets could always fall further.

Most of all, look after your health and stay sensible. Without pointing fingers at the reactions in particular countries, I saw footage of hundreds of people lining up, bunched close together, to buy masks. It’s probably not a good time to follow the herd…

And yes, Japan makes its own toilet paper and there are warehouses full of it waiting to be delivered to stores soon!

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

 

 

 

Coronavirus and Markets – What Can We Learn from SARS?

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There is still a lot of uncertainty about the the severity and duration of the current coronavirus epidemic, with some health experts predicting it will all be over by April, while others see a large proportion of the global population at risk of infection. When it comes to the effect on markets, it’s logical to take a look the impact of the SARS crisis for guidance. However, it’s important to remember that, not only are we talking about two distinct disease profiles, but we are living in a different world economically from seventeen years ago.

The SARS epidemic, which originated in Guangdong province in China, ran from November 2002 to July 2003. It had a significant, but relatively short term, market and economic impact. The most heavily hit sectors were tourism, retail (particularly luxury), airlines, casino and property. For 2003 GDP growth fell about 1% for China and 2.5% for Hong Kong. Hong Kong’s economy went into recession in April 2003 before recovering substantially.

The MSCI China fell 8.6% on the SARS outbreak, but rebounded by more than 30% in the three months after April 2003. Stocks in Hong Kong fell by a fifth but also came back strongly. Cathay Pacific shares dropped almost 30% from December 2002 to April 2003, before bouncing back to almost double through the next year. In Japan the Nikkei 225 also dropped by almost 6% but was quickly restored once the crisis was deemed over.

The Hong Kong property market was already suffering the after-effects of the Asian financial crisis, and SARS extended the decline by a year or so. Home prices fell by 8% in the first seven months of the SARS epidemic before rebounding for the rest of the year. Conversely the current coronavirus has come along at a high point in the housing cycle.

The US stock market tends to shrug off epidemics somewhat easily. The table below, taken from Dow Jones Market Data in this MarketWatch article, shows how the S&P 500 has reacted over 6 months and 12 months in previous outbreaks:

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When assessing the likely impact of the current Covid-19 coronavirus, it is important to note some major differences in the Chinese and global economies between now and 2003:

  • In 2003 China’s GDP was 4% of the global total. Now it stands at 17%.
  • China’s economy was largely manufacturing and trade seventeen years ago, compared to consumption and services / tourism today. Government-imposed bans on travel will hurt more in the current environment. This is a blow to Japan’s inbound tourism boom for example.
  • In 2003 the Chinese currency was still pegged to the dollar. Now currency markets are freer, which could mean a weakening of the Yuan.
  • The global economy in 2003 was in a much earlier phase of the business cycle and global cooperation in trade was increasing, in contrast to the “trade wars” that have characterised the last 12 months.
  • On the other hand, monetary policy in both China and the west is now far more supportive than it was in 2003.

Clearly the economic impact this time around will depend on how long the epidemic lasts and how far it spreads. Countries close to China will obviously be impacted more severely. Typically the effect of a disease outbreak on market confidence can far exceed it’s actual impact. Once things are under control the recovery should be fairly swift, although there are plenty of other factors that could influence markets in the coming months.

Once again, refraining from panic decisions and staying diversified is perhaps the best advice for investors.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

 

 

 

Coronavirus – How to Protect Your Investments

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What a year this month has been! I can’t believe I wrote a 2020 Investment Outlook just nine days ago and talked about trade and geopolitical tensions in the Middle East as potential trapdoors for markets, without any mention of epidemics. Things certainly do develop quickly!

Most importantly here, the sensible advice when it comes to protecting yourself and your family from the coronavirus is to wash your hands thoroughly and often. There’s a lot of alarmist “fake news” out there but this article keeps things very simple.

So what’s the equivalent of washing your hands for your investment portfolio? In yesterday’s LinkedIn post, Bridgewater Associates founder Ray Dalio put it quite succinctly: “When you don’t know, the best investment strategy is to be smartly diversified across geographic locations, across asset classes, and across currencies.”

If you are a regular reader of this blog, then hopefully he is preaching to the choir. Here’s a post I wrote in October 2018 titled “Don’t Panic”.

A couple of points I would clarify for individual investors, and expats in particular:

  • Diversification is important, but make sure your weighting to each asset class fits your risk profile. Conservative investors and people close to retirement should have a heavier weighting to cash and bonds than a young, growth-oriented investor.
  • Dalio mentions diversification across currencies, which is by no means a bad thing, but remember it’s also important to build assets in your base currency to minimise currency risk.

So stay safe out there: don’t panic, wash your hands and stay diversified.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

 

2020 Investment Outlook

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And just like that, another year is gone! After a long wait for the 2019 Rugby World Cup to get started in Japan, the six-week tournament went by in a flash. And now here we are looking forward to the Olympics. I hope 2019 was a rewarding year for you.

When it came to markets, it was one of the best years for risk assets since the Global Financial Crisis with the S&P finishing +30.7%, MSCI Europe +27.1%, MSCI UK (despite Brexit) +16.4%, Japan Topix +18.1%, MSCI Emerging markets +18.4%. Crude oil was +22.7% for the year and Gold +18.3%. This appetite for risk meant that safe haven government bonds were subdued, while US High Yield and Emerging Market bonds returned +14.3% and +12.6% respectively. Bitcoin once again refused to die and posted an impressive return of +95% for the year.

Looking forward to this year “Don’t expect a replay of 2019” seems to be a recurring message, particularly when it comes to equities. Once again Bloomberg have compiled a thorough Wall Street round up for people who have the time:

For those who like to keep it simple, here is a list of key themes to look out for:

  • The end of the bull cycle is getting nearer, but it is still not here yet…
  • Equity and bond market valuations are significantly higher than they were a year ago.
  • Central banks are likely to continue pursuing ultra-loose monetary policy.
  • Smart investors remain invested but are staying alert and perhaps reducing risk.
  • The recent escalation between the US and Iran highlights the potential for sudden geopolitical shocks.
  • There is still potential upside for gold if/when things get rough.
  • Don’t let the US election distract you too much. Politics are not necessarily a good indicator of market returns.
  • Trade is again likely to dominate headlines and unsettle markets from time to time.
  • The Bitcoin halving occurring in May is likely to dominate crypto talk – here’s a detailed and rather bullish post on that for those interested.

At risk of repeating myself year after year, planning and strategy don’t need to be complicated:

  • Have a plan! Read this post if you don’t have one.
  • Stick to your guns. Don’t let the noise divert you from your commitment to saving and investing. (the Japan market made most of its returns in the last third of 2019. If you weren’t buying in the first two thirds then you missed it)
  • Diversify and rebalance – particularly if you are heavily invested in stocks and coming off a good year.
  • Max out tax advantaged investments such as NISA.
  • Look for Japan stocks that are likely to benefit from the Olympic buzz (see what happened to The Hub stock price around Rugby World Cup time)
  • Keep an eye on what the bank of Japan are buying – see post here.

With that I wish you all the best for 2020 and hope you enjoy the Tokyo Olympics!

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

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