Good reads from around the Web.
What a week it’s been in the markets! If you’re (sensibly) a passive investor [1], then hopefully the turmoil has passed you by.
But if like me you’re an active dabbler [2], then you probably know what I’m talking about.
The short summary is the US market has become much more volatile on a intra-day basis (though pretty flat on a weekly view), the oil price fell further than almost anyone thought possible, and to top it all the Swiss National Bank removed the cap on its currency – a dramatic and unexpected move akin to an elephant parascending onto a crowded kid-strewn bouncy castle.
The chaos left made some big name FX brokers reeling if not insolvent [3].
So the first lesson of the week is relevant for everyone, which is that things fail [4].
I’ve said before I would never have all my money with one fund group (not even Vanguard) nor one broker. This week shows why.
I still meet or read about people with nearly all their money in 1-2 shares, which is insanity unless you founded and run the company. Even then it’s extremely unwise.
But I’d also question the wisdom of running your entire diversified passive portfolio on just one cheap online platform.
Many do it. I wouldn’t.
Sure, the 50-1 leverage used by traders on those FX platforms was a clearly outsized risk compared to an online broker or platform with segregated accounts [5] that supposedly keeps your money safe.
And yes there are investor compensation schemes [6].
But things can go wrong, and they’re always unexpected things. The fail-safes may fail.
As The Accumulator wrote in one of those articles on the subject:
Does it matter? Can the worst happen?
It’s rare, but yes it can.
It’s a personal choice, but for me paranoia is a price worth paying.
It doesn’t hurt to look, does it?
As for what you should do in light of this recent volatility, the house view [1] is that most people are best off being passive investors and doing nothing.
Fiddle, and you’ll probably make things worse.
(Of course I’m assuming here that you’ve got an appropriate asset allocation [7] for your temperament and long-term goals in the first place.)
At times of scary headlines, the best thing to do is often to just look the other way, as Morgan Housel said this week at the US Motley Fool [8]:
Go do something else.
Maybe read more books and fewer articles.
Be more choosy about who you’re willing to listen to.
The amount of financial information available has exploded over the last decade, but the amount of financial information that you need to be informed has not.
You have to learn how to sift through the news, and filter out what you don’t need.
“A wealth of information creates a poverty of attention,” Herbert Simon said. It also creates a dangerous tendency to lose self-control over your ability to be a patient long-term investor.
Just look the other way.
It’s great advice. If you’re a passive investor then I suggest you skip straight down to the links below!
The gnomes of Zurich
Still here? Really? After seven years and ever fewer articles about active investing on Monevator, you still haven’t got the message?
Oh well, I can’t be a hypocrite. So for what it’s worth I’ll offer up a very brief bit of frothy speculation.
A few crazy long-time readers even asked me what I thought. (Careful! I am just a bloke on the Internet!)
To start with, I don’t think the heads of the Swiss National Bank suddenly woke up lobotomized. They knew the chaos their action would cause, and they knew it would inflict a lot of hardship on their own economy.
We also should keep in mind that there was only recently a (failed) referendum on returning Switzerland to a gold standard of sorts. Clearly a significant chunk of the Swiss population was growing wary of trying to fight the plunging Euro.
So I think it’s pretty much nailed-on that the ECB is going to announce full-blown quantitative easing in the next few days.
Either the Swiss got a heads up from Mario Draghi or took their cue from a recent EU lawyer’s decision [9] on the legality of European QE, or else they spend all their days thinking about such things, and they’ve divined it ahead of the market.
(Of course people will say the market already expects QE from the ECB, too. But if certainty was really a widespread view, then we wouldn’t have seen the storms we saw following the Swiss move. I think more money would have already been positioned ahead of it, and hence the volatility would have been lower).
2015: A year of living dangerously
And what of the US intra-day volatility?
A few things are going on, I’m guessing.
Firstly, the collapse in energy prices was unforeseen, and it has wide macro-economic consequences as well as an impact on pretty much every listed company. So everything needs to be repriced in light of this development.
That is even leaving aside the fact that it may be telling us global growth is rolling over, because it’s really a demand shock. (I doubt it, but it is a risk).
Secondly, I suspect money is repositioning itself ahead of ECB action, possibly by buying into Europe (optimistic investors) or even more into bonds (pessimistic investors).
Thirdly, “everyone knows” (see Swedroe in the links below) that the US is an expensive stock market. So no wonder they dump it if they worry about the above.
Fourthly – and this is a gut feel thing – I think markets, including oil, are more illiquid or certainly less buffered than they used to be.
Perhaps it’s down to investment banks scrapping trading desks. Perhaps there’s less leverage in the system at hedge funds or similar. I can’t quantify it and it might be a misleading path to go down – because things have been so placid for so long, as volatility has been smothered by low interest rates, that we may have just forgotten what real volatility feels like.
But with that caveat, I think something has changed.
Fifthly, related, the Swiss National Bank move, the role of leverage at the brokers, and the associated fallout gives us an insight that you can’t regulate away risks, which regulators seem hell bent on trying to do.
As I’ve written before, risk cannot be eliminate, it can only be transformed [10].
Fifth-and-a-half-ly – It also gives us an insight into what happens when risk is effectively taken out of the markets and placed with Central Banks. Calmer most of the time, but the ever-present danger of big Central Bank initiated dislocations.
Finally, I don’t want to scare anyone but when stock markets crash, it’s my belief and experience that they behave in the way that the US market has been acting over the past six months.
Leadership narrows (fewer stocks go up) and at the end of the run you get violent swings up and down.
The US market has had a terrific six years. We don’t need to see a massive bear market crash, but a significant correction is well overdue, in my view.
It may be as I say that money is repositioning itself out of expensive US shares and into European equities ahead of the ECB move. It may even be that the volatility doesn’t presage a crash, but rather a lurch higher – that’s possible.
Think of an old engine juddering and coughing as it either roars to life or else conks out. I suspect that may be where we are with the US bull run at the moment.
Don’t do what I do
What have I been doing?
With most of my portfolio – nothing.
At the margin, at a portfolio level: Reducing US exposure, trading energy stocks, building up a position in commodity producers (from near-zero!), and adding more European exposure. (I waited a long time to buy more into Europe as I was and still am fearful of the currency risk).
Caveat: The active share of my active investing is active. This might all be different by next Saturday!
The bottom line is that if you aren’t a well-diversified investor because it has seemed pointless in the past few years of placid markets, you might consider this a wake-up call.
Or at the least, know all the risks you’re taking, however you’re invested.
Good luck!
From the blogs
Making good use of the things that we find…
Passive investing
- How passive funds work – Maven Capital Partners [11]
- Questioning the small cap premium – Research Affiliates [12]
- My investment portfolio – Can I Retire yet? [13]
Active investing
- A dozen things learned from Tom Murphy – 25iq [14]
- Forecasting the FTSE 100 – UK Value Investor [15]
- Market timers Vs macro hedge funds – The Brooklyn Investor [16]
- Stretching the high-yield rubber band – Investing Caffeine [17]
- Beddard: The slide into certainty – iii blog [18]
- Is any market on earth still cheap? – The Value Perspective [19]
Other articles
- Why is currency risk bad? – Oblivious Investor [20]
- Things we “know” but can’t prove about investing – mSantoli [21]
- Where you live and your retirement budget – Simple Living in Suffolk [22]
- Expenses report: The extreme bloodbath edition – The FIREStarter [23]
- In contrast, Mr Money Mustache had a good year for spending – MMM [24]
- A dynamic retirement income strategy [US, heavy going] – Advisor Perspectives [25]
Product of the week: NS&I has finally launched [26] its eagerly-awaited Pensioner Bonds, or “Guaranteed Growth Bonds” to give them their official name. That’s presumably a way to sidestep the fact they don’t pay the monthly income many pensioners wanted. Oh well, the rates are unbeatable for cash, so if you’re over 65 then go load up! (Actually so many have already done so that they reportedly crashed the website, says ThisIsMoney [27]).
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1 [28]
Passive investing
- Swedroe: Why do anomalies like low volatility still exist? – ETF.com [29]
Active investing
- UK IPOs beat the FTSE 100 in 2014 – City AM [30]
- Income hunt drives investment trust issuance [Search result] – FT [31]
- “Dear hedge funds, it’s not you it’s the fees” [Search result] – FT [32]
- Buffett’s stock picking successors damned for one duff year – Fortune [33]
Other stuff worth reading
- Swedroe: Forecasting follies, 2015 edition – ETF.com [34]
- Inflation: What’s really going down in price – Guardian [35]
- Why now is the time to move to your second home – Telegraph [36]
- Should you borrow instead of buy your next boiler? – Guardian [37]
- I get the odd troll in the comments. This Saudi blogger gets flogged – Sky [38]
Book of the week: Reader Phil spotted William Bernstein’s short investing pamphlet If You Can available for free as a PDF on ETF.com [39]. Its presence on a mainstream site reassures me that this is not a pirated copy, but if you know different please do let me know.
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- Note some FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩ [44]]