The standard cliché is that, when a trader or investor makes money, it’s because he’s clever. However, when he loses money it’s because a) the market’s rigged against him, b) algorithms and AI are to blame, or c) his advisor is at fault. The trouble then is that, rather than moving on to another asset class/advisor/strategy, he returns to the same playing field often for another headbutting.
This is likely to be the case at the start of next year where, with all but three major stock market indices in negative territory in 2018 (Brazil, India and Dow Utilities if you must know), investors will pore over brokers’ outlooks for 2019. I would suggest reducing holdings in these, and allocating more money to safer products.
Cash is the quickest and easiest, and requires no input from an (often unreliable) financial advisor. However, remember that under the Financial Services Compensation Scheme a maximum of £85,000 is protected and must be held at a deposit taker authorised by the Prudential Regulation Authority. An individual savings account (Isa) wrapper is a good idea.
The next step is to consider a fixed-term deposit where, by convention, anything longer than two years is called a bond. Most will have a credit rating where investment grade is paper rated higher than BBB-. Remember that ratings can change over time, which is especially important with long maturities. The UK Treasury-backed National Savings & Investments have a decent selection and are just a phone call away – no expensive intermediaries required – and paperwork is top-notch.
Government bonds can be bought through your bank for a small, one-off flat fee, not a percentage of face value. They will be held in a ledger by the bank in your name. Corporate bonds are available at specialist dealers – usually the larger investment houses. And don’t forget that there are exchange traded funds (ETFs) on many combinations of these.
Inflation-linked bonds are misunderstood by many, a classic case of mispricing spotted over the last eight days. The price of the benchmark UK Treasury 0.125 per cent 2068 rocketing from £205 per £100 nominal to almost £250 on Monday.
Bond yields move inversely to prices, and are only very loosely linked to central bank interest rate targets. The Bank of England’s bank rate slumped from 5 per cent to 0.5 per cent in the financial crisis, roughly where it’s been since April 2009. Now look at what happened to 10-year gilt yields over that period. On a relentless downward trajectory since 2007, with minimal back-ups along the way, and spectacularly subdued since 2016.
The trajectory for US 30-year Treasury bond yields has been dramatic, considering the many changes in the Fed Funds target rate. With the yield curve currently threatening to invert again, potentially presaging another recession, the secular drag to lower yields remains intact.
German bund yields, considered by most as the top-quality eurozone government paper, turned briefly negative in 2016 – subsequently staging the tiniest back-up in yields on record. The secular trend of Europe’s best inflation fighter, where even German unification in 1990 didn’t spark a trend change, continues. Swiss 10-year Confederation Helvetique bonds also turned negative in 2016 – and continues to remain so today. This is because the central banks of both have penal, negative rates of interest on cash holdings.
