Wednesday, 16 December 2015

Handling stock market swings.

What’s the best way to handle swings in stocks and retain value within an investment portfolio?

This may seem like a silly thing to think about now, but you don’t start planning for a bear market after it occurs. If you prepare yourself psychologically for any investment environment ahead of time it decreases the chances of blowing up your portfolio by making unforced errors at the wrong time. Over the summer there have been a number of warning signs appearing in equity markets.

You don’t need to get fancy with disaster hedges. High quality intermediate-term bonds have been your best option for preserving capital during an economic disaster consistently in every neative market year since 1928. They do their job as the portfolio anchor during periods of stress to give investors dry powder for rebalancing purposes to buy stocks on sale or for spending purposes so stocks don’t get sold after a crash has occurred.

Stocks can fall far and fast but also tend to recover very quickly. That’s why bailing out of stocks after they crash just compounds your problems if you held them through the crash in the first place. If you have lost money on a stock investment hold the stock unless there is a fundamental reason why that specific stock will not recover.

Balance is the key to surviving these periodic crashes. The Balanced Asset Class Index which included large caps, small caps, value stocks and bonds fared much better than the all-stock options and outperformed the other options over the full cycle 4 out of 5 times. The key is always having a diversified portfolio of investments.

The biggest thing is to have a plan and stick with it (everyone says this but it’s true). You won’t know the exact reasons ahead of time as to why the market will fall, but understand that you will see a handful of market crashes over your lifetime.

There’s no way you can avoid risk in the financial markets if you hope to beat inflation over the long-term and earn a respectable return on your portfolio. Stocks outperform bonds over longer cycles, which in turn outperform cash but bonds provide stability when you need it the most. Stocks wouldn’t offer a risk premium over bonds if they didn’t have these periodic large selloffs.

It’s also important to understand your ability and willingness to take risk. Allocate more money to less volatile investments if you can’t handle losses, but understand that you will likely have to save more to reach your financial goals if you carry a more risk averse portfolio.

And for those investors that are in or approaching retirement, don’t have money tied up in stocks that you’ll need to use for spending purposes within 5 years or so. It’s too much of a risk that stocks could take a hit right when you need to sell if you have an all-stock portfolio.

There really are no one size fits all answers to this problem as every investor’s tolerance for risk and investment strategy is different. Investing really is a balancing act that’s full of trade-offs. There is a constant tug of war going on inside our brains between fear and greed depending on the market environment. We want to be able to sidestep losses in the markets and only participate in the gains but it’s impossible to to invest in stocks and not experience periodic losses.

Pick your position and understand your emotional swings. Maintain a balance of assets within your portfolio and always keep an eye open for a new entry point if stock markets do become cheaper.

Tuesday, 1 December 2015

5 investment funds set to rally in Europe.

Last week’s news that the European Central Bank (ECB) wouldn’t pump a greater amount of money into the economy each month disappointed many investors and the UK FTSE dipped as a result.
However, ECB chief Mario Draghi did pledge to continue quantitative easing until March 2017 or beyond, which is at least six months longer than the original deadline, and cut the region’s deposit rate in an attempt to boost the eurozone’s recovery.

European equities have been one of the best performing asset classes in 2015 despite issues surrounding the Greek debt negotiations and many market commentators expect another strong year for the continent’s market in 2016.

Now the ECB has committed to its quantitative easing program, the odds are European equities will make further gains from here are five fund picks that should benefit from a liquidity-fuelled rally.

Threadneedle European Select
For investors looking to buy into a big brand fund, Threadneedle European Select could be set to benefit from an EU rally. This has long been one of the highest rated, core European equity funds. It is a concentrated portfolio of circa 40 mostly larger European companies, with strong competitive advantages, recurring revenues and consistent above average earnings growth.

Well recognised brands often fit this profile and constitute a large proportion of the portfolio. These include Unilever, whose diverse brands include Marmite, Wall’s ice cream, Persil and PG Tips; Richemont, whose luxury brands include Cartier, Jaeger-LeCoultre and Montblanc; and brewer Anheuser-Busch InBev which is in the midst of a mega merger with SABMiller. 

Neptune European Opportunities
The immediate market reaction following today’s ‘underwhelming’ ECB announcement is totally in keeping with recent investment behavior. By falling short of expectations, the market is highlighting an investor addiction to central bank asset purchases (QE), with stocks and bonds selling off aggressively and the euro appreciating. By increasing longer-dated interest rates, banks can command more margin on their loans, which acts as an incentive to extend more credit.

In a more profitable environment for banks we would recommend the Neptune European Opportunities fund, a strategy which is firmly overweight retail banking.

Edinburgh Partner European Opportunities Fund
If you assume that value stocks are going to be better than safer growth stocks, though that might not necessarily be the case, then Edinburgh Partners European Opportunities is our value option within Europe. It’s had a tough year so far, but it stands a good chance of it catching a rebound in sentiment.

Argonaut European Enhanced Income
The two main reasons I’ve chosen this fund are that bond yields are going to remain compressed, meaning equity income will remain in demand with bond yields so low. In addition, the fund hedges out currency and further stimulus is likely to keep the euro weak.

As the name suggests, the fund aims to achieve a high income yield (by writing covered call options) as well as some capital growth, and does this through a concentrated portfolio of 47 holdings.

Hansteen Holdings
You may choose to opt for a REIT to utilise the continuation of QE. We saw property prices remain strong in both the UK and US during their own period of QE, so with further stimulus in Europe, demand should be strong.  We prefer to target holdings with industrial and office exposure.

As such our preferred option would be Hansteen Holdings, which invests in both UK and continental European industrial property. The properties it holds (it currently has 538 in the portfolio) are chosen for a combination of strong occupancy rates and high yields, and the team finds a majority of these in Germany, the UK, Belgium and the Netherlands.