More people are worrying about equities crashing that at any time recently; in my opinion.
When Martin Wolf writes a paper for the FT that predicts an imminent crash, people take note but not in hoards, not like this
Why can’t we ignore what Martin Wolf is saying?
We cannot of course ignore what Martin Wolf is saying because he has a habit of being right but many people have been right but ignored so the consequence of being right is deferred.
The question we have to ask is “can we survive a downturn” both financially and in what the loss of theoretical capital does to our brains!
So what is the cost of withdrawing from equities and moving into cash. I would like to say that there is no longer a bid/offer spread but most of us know that we cannot get out what is quoted us nor get in at the price we expect. There are hidden spreads which to us members or policyholders of DC plans only reveal themselves when we have transacted.
This is a part of the price of bailing out, the other part is of course the increse in the market to the next crash happens. This is the agony of being invested in equities for our futures. Whether this money is in an ISA or Pension or General Account does not make much difference when it comes to consequence.
For most of us, markets are bouncy but the older ones of us know the Japanese market which crashed and did not bounce back and many people never got their investment back, cashing out – tired of waiting.
And so to Martin Wolf ‘s article.
The headline resonates with me – and what with you. Do you notice a fellow with a dunce’s hat with a log heading towards his boat which will wreck it if its arrows of direction are as indicated and of course these arrows look like the signature of market corrections – more than corrections – these lines say “crash”. Do you see yourself as that dunce, I feel I will be if I don’t sell equities for cash on Monday. But I’ve said that many “Mondays” before and we are still “going up” when it comes to market values.
What is Martin Wolf ‘s conclusion
So, what are investors to do? This depends, as always, on both their time horizons and capacity for bearing losses. If the former are long and the latter are large, they can stay fully invested. Those without the luxury of time or robust financial security need to hedge. Options are a possibility; cash (and not just dollars) and precious metals are others. In today’s world, remember the downside risks.
In today’s world? I don’t remember any world that I didn’t think could see a further market crash until I got back to where I started. Of course we win or lose money with our investments every day and if we considered the impact of these daily fluctuations on our capacity to pay to pay for shopping or theatre tickets , we’d certainly get into cash.
I thought when I set out on this blog that I’d be discussing all the charts that tell me that we are at the point of the cycle when things go wrong. I would be writing an article that explains we are making precisely the mistakes of hubris that got us in 2000 or 2008 and will get us again.
But I didn’t. Martin Wolf ‘s article charts lay undiscussed but you don’t need to read the detail. This of course is Martin Wolf and we know that what he is writing is not investment advice – is it?
I will not take Martin’s advice because there is none. If you have got this far and you aren’t an FT subscriber, here’s a gift article. If it runs out, email me at henry@agewage.com.
Another reason why a defined or targeted pension income should be sought in preference to a pension pot.
In a DB pension scheme a market downturn can be accommodated / mitigated by a surplus buffer and then by the sponsor’s guarantee (let alone PPF protection).
In multi-employer CDC, as being set up in the UK, there is neither. As happened after the global financial crisis, there is a likelihood in a market crash that market values and interest rates would both fall, exaggerating the effect on both projected and actual pension incomes.
However in both DB and CDC this will depend on the point in the lifecycle of the Scheme; If the scheme is open and attracting net new contributions the fall in market prices increases the projected “dividend” yield. In other words you are “buying more bang for your buck” on new investments and the impact of a crash is cushioned and may even increase pension prospects. It will be the future cash return from the investments that ultimately determines the pensions that can be paid.
in a market crash, it is the return from the sale of an investment that suffers The lesson for trustees is to get yourselves into a position that you do not have to sell any investments following a crash – keep DB schemes open and seek to remain cash flow positive in both DB and CDC. That will matter far more than liquidity.