The intense volatility of the stock markets, our own in particular, is enough to make a speculator’s head spin.
One day you see shares falling like a stone and the next they soar – though not necessarily back to their previous day’s high.
Nothing, except perhaps another negative employment report may have been reported from America in the previous 24 hours, or another rude verbal gesture by Iran towards Israel, but it¹s enough to spark a rash of sell orders around the world.
The aim of this column (and the previous two) is to suggest ways to protect what investment wealth we already have from this tumultuous financial environment.
To recap, the first thing to do is to have an audit of your wealth and its current value.
If you use a professional advisor, the cost will probably be in the region of a couple thousand euro, though this might be offset against other work undertaken by the fee-based advisor.
An evaluation of your pension fund and mutual funds (i.e. life assurance investment plans) is especially important since this is where most Irish people are exposed to the investment markets.
For people who only have investment exposure through their employment pension, it is important to find out if that pension is on course to provide you with a satisfactory retirement income.
You may want to top it up with an AVC (Additional Voluntary Contribution) if you are not going to have full 40-year pensionable service and that means choosing a mixture of suitable assets for the AVC.
In my interview recently with Mark Westlake of Gold and Silver Investments, a new fee-based wealth management service, Mr Westlake kept emphasising the need for balance and diversification in your investments.
Too many Irish people have too much of their money invested exclusively in property and Irish shares and have taken a hammering over the past year as a result. This trend is still downward, he believes.
The ultimate goal is to get a fine balance of assets in your portfolio. This stems from equities drawn across many diverse sectors and geographic locations, such as the ‘BRIC’ economies of Brazil, Russia, India and China. It also includes property, commodities and certain bond and cash funds for security.
However, Mr Westlake admits that “the problem at the moment is that there are only a limited number of number of inflationary lifeboats that you can put your money in to protect your wealth in the event of the worst case scenario, which is stagflation.”
Stagflation refers to a stagnating economy in which consumers are squeezed by little or no growth in wages, but must meet the cost of inflating prices.
“In that situation lots of assets do very badly like cash, which barely keeps its value. The two obvious assets that tend to do well, are gold bullion, which works when other assets don¹t and inflation-linked government bonds issued by sovereign nations like Germany, France, the UK and US,” he said.
“These bonds offer protection against the cost of living going up. As with gold we don¹t recommend that you put all your money in bonds, but definitely for someone approaching retirement and your twin fears are a stock market crash and inflation, then you definitely need to consider bonds.”
He adds: “How high will gold go? We don’t know. But we believe that while there is systemic risk of bank failures, to the danger of the collapsing dollar and continuing higher inflation then the price of gold will keep going up.”
The inflation risk, and the long term energy risks that we face (along with the rest of the globe) has acted as a catalyst for one of Ireland’s best known financial advisors, Eddie Hobbs, to write a new investment guide which will be published early next year.
By his own admission, Mr Hobbs is a late convert to these energy risks and is deeply worried about the effects that inflation will have on our current investments.
Our portfolios, he says, now need to include conventional and alternative energy, commodities and infrastructure stocks, but “all assets held should be screened by their positive or negative sensitivity towards energy-led inflation”.
Like Mark Westlake he warns about holding cash and non-inflation adjusted bonds in such an environment.
I’ve have a sneak preview of the first draft of ‘Energise’ in which Mr Hobbs gives a pocket perspective on how we’ve found ourselves paying over $100 for a barrel of oil and how the future will be a very different place as fossil fuels become more scarce.
The new book identifies a range of energy, commodity, related infrastructure shares and index funds that are fulfilling the high demand by global industries and especially by developing economies for these commodities and services.
Many are well-known, giant, corporate players like the Brazilian petroleum company Petrobras (NYSE; PBR); the mining giants BHP Billiton (NYSE; BHP) and RioTinto (NYSE; RTP); and the hydropower giant Fortum of Finland (FUM1V).
All of these companies have market capitalisations in the tens of billions and have growing balance sheets and profits.
Investing in smaller energy, commodity and infrastructure is also discussed in Mr Hobbs’s book, but he warns that while the upside reward is potentially very high, especially if you time your purchase well (a very difficult process), the downside risk can be huge.
Investors need to keep a close eye on their own capacity to absorb losses, he reminds the reader.
Picking the stocks and funds that produce a diverse, rewarding investment portfolio takes knowledge, hard work and luck.
Using a professional advisor and also doing your own research, all the while watching the overall costs and charges involved is as likely to be a winning formula as any.