Business

A crisis like this creates no shortage of ways to make money

The dramatic drop in the Pound over the past week was notable because of its speed and intensity but not because of its direction of movement. Since sterling bought a steady four dollars in the immediate post-war years, it has been a one-way street for sterling against the US currency. The inevitable slide toward parity is unwelcome, but it hardly turns anyone’s world view on its head.

That cannot be said for some of the other dramatic changes sweeping the investment landscape at the moment. For almost my entire working life, we’ve been able to stick to some truisms about investing. Phrases like “time in the market, not market time” become investment proverbs because their truth lasts through the ups and downs of the cycle.

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But sometimes, as Jim Callahan pointed out on politics in the 1970s, there’s a big change we can’t do anything about, and it’s only really apparent in hindsight. In investing, perhaps the most famous was the start of the so-called “cult of equity” in 1956 when George Ross Joby, director of the Imperial Tobacco Pension Fund, made a radical claim at the time that stocks offered better inflation and risk-adjusted returns than bonds. . He was right and the rest is market history.

Researching the equivalent sacred cows today, I was concerned to discover how many things I could list about investing that I used to believe unreservedly and of which I am not sure now.

First on my list is the foundational belief that splitting your investment portfolio between stocks and bonds will always smoothen your investment journey, smooth out peaks and troughs and help you sleep better at night. This year has been a shocking reminder that in certain circumstances (think high inflation and central banks are willing to risk a recession to control it) bonds and stocks can do very badly at the same time.

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The past nine months or so have tested the destruction of the comforting idea that when one of these two asset classes falls, the other tends to rise. Risk-averse investors who sought shelter from a traditional balanced fund reasonably ask their advisors what just hit them.

The next myth raised by recent events is that gold is a method of hedge against inflation. This illusion gained traction in the 1970s when the precious metal performed well along with a sharp rise in prices, but there is more correlation than causation at work here. The truth is that gold does well when inflation is higher than interest rates and bond yields.

After that, the mineral is relieved of its most obvious drawback, the fact that it does not pay an income. Negative inflation-adjusted returns or real returns are the key to higher gold prices. These are often associated with periods of high inflation but are not always. Today’s rapid swing from negative real returns to positive real returns and the associated underperformance of gold this year makes this point.

The third truism is a newer access to conventional wisdom and its reversal this year may be seen as a return to a more enduring truth of investing. The cult of growth, most notably the outperformance of technology stocks in recent years, hit the sand as rising interest rates altered the calculations of discounted cash flow models that place a high value on future earnings.

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Investors are once again looking for the bird on hand that less exciting but steady cash generators and dividend payers can offer. Twenty years ago, the dot com crash reminded us that stocks with low multiples of earnings or assets, or that paid high, sustainable income, were worth more than the market often admits. I think we’re re-learning that day.

The fourth accepted fact that is starting to go beyond the date of sale, says that cash is rubbish. Associated with this is the belief that annuities are an exorbitant waste of time. For years, both were true, as low interest rates meant the value of cash had been eroded by inflation, and the peace of mind offered by premiums was exorbitant.

Today, a 70-year-old looking to secure an income for the rest of his life can have a guaranteed 7.5 percent, or about 5 percent if he wants to have some degree of inflation resistance. Setting aside enough of your savings to cover your basic expenses for the rest of your life again is a viable option for those of us who like the flexibility of a rollback pension but don’t want to spend our final years worrying about the market.

The ultimate investment fact that has dominated market thinking for years but has been undermined by recent events is that in time China will be just as big as America but bigger. Beijing’s recent prioritization of “common prosperity” over economic growth underscores that China has long since abandoned the Western development model.

Ten years ago, the continued growth of the Chinese middle class and its journey through the acquisition of household goods and toward the consumption of leisure and financial services seemed like a one-way bet for investors. The real estate bubble, regulatory pressure, and the zero-Covid politics of later make things look a lot more difficult to navigate.

What does all this add? In some ways, there’s a more difficult backstory than during what we’ll see as a golden age for investors. But I also hope that there will be a period ahead when the opportunities will lie dormant for many years. There will be no shortage of ways to make money in the markets in the future or to protect their value; We’ll just have to look for it in different places.


Tom Stephenson is Director of Investments at Fidelity International. Opinions are his own.

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