Can you still count on a buy-and-hold investment strategy?
The cult of equities is dead, says this British advisory, so while you can still buy stocks, you’d better surround them with other investments.
Danger lurks on every side.
Investors have to protect themselves against the effects of events happening thousands of miles away.
Thus far, stock markets have shown remarkable resilience against political upheaval in the Middle East and a catastrophic natural disaster.
But one British advisory doesn’t trust those markets.
The Fleet Street Letter believes the stock market itself is a dangerous place, never mind the world outside.
It worries about the “dark pools” of insider and professional trading that happen behind the scenes, away from the main exchanges.
And it believes that the London exchange (which may soon be attached to Toronto’s) could have a “flash crash” to rival the one that struck New York ten months ago.
As a result, it has built what it calls a hedge fund portfolio. But it is not filling it with stocks.
The advisory still recommends a group of conservative stocks to its readers. But when it comes to hedging, the advisory’s Investment Director, Mr. Theo Casey, thinks it’s time to forget about buying and holding.
The cult of equity
This is how Mr. Casey states his case. “We need to be pragmatic, not ideological, in order to survive. And looking at the market pragmatically, it seems that the cult of equity is dead.”
That’s not a flippant remark, he adds. According to one Citigroup report, global equities turned in a 29 per cent loss in the last decade. There have been two bear markets that lost 50 per cent in the past five years.
At the same time, government bonds have gained 80 per cent. Despite what many commentators have said, Mr. Casey insists that bonds are much less risky than equities. He pours still more scorn on stocks.
“From an unbiased perspective, they are pretty crummy investments.”
Academics rave about the potential of stocks, he continues. Pursue a buy-and-hold strategy over the long term, about 10 years, and you would enjoy “outsized gains.” The Investment Director is not convinced.
“Well ten years hence, we are reappraising the wisdom of such a call. Buy-and-hold, in isolation, much like the cult of equity, is dead.”
Safer places
Move your money into safer places, he advises. Since taking over this portfolio, Mr. Casey says, he has successfully recommended “government bonds, structured products, stock options, corporate bonds, commodities and foreign depositary receipts as well as traditional UK shares.”
In other words, while stocks are not banned altogether, they just don’t get privileged treatment anymore.
This analyst also thinks advisers spend too much time diagnosing investors — are they high or low risk, are they large cap or small cap investors, do they seek income or capital gains?
“I like to spend the minimum amount of time analyzing myself and the maximum amount of time analyzing the market,” retorts this analyst. “Opportunities will present themselves in whichever way the market determines.”
The classic hedge funds, such as that of Mr. George Soros, have been flexible, betting on currencies as well as stocks and commodities.
Concentrate too heavily on large cap high yield stocks at home, adds the analyst, and you lose touch with what’s going on in other markets.
And it’s easier than ever to invest in world markets with exchange-traded funds, or ETFs. In fact, the hedge fund portfolio carries Deutsche Bank MSCI Emerging Markets TRN Index ETF (LSE-XMEM).
Mr. Casey bought this fund for the same reason he does everything else. He did not want all his eggs in one basket. The portfolio had several iShares ETFs, which do have the advantage of low expense ratios.
But what if something went wrong at Blackrock Asset Management, the company that administers iShares? Don’t get trapped in one place, says the analyst, and don’t let your broker put you in that trap, either.
A more sophisticated investor
Mr. Casey has one more bold statement to drop on his readers.
“You are a more sophisticated investor than your broker.” Read 3,000 words or more on the market every week, and you’re more sophisticated than most private investors and many institutional investors as well, he goes on to say.
“While it’s normal to assume that brokers know what they’re doing — after all, they’re closer to the market than you are — don’t take that risk.”
Don’t let your broker do all the talking. Speak up with your own thoughts on the market. What Mr. Casey is saying to his own readers is, tell your broker what I’ve told you.
In the end, this analyst doesn’t think you need to give up buying and holding stocks altogether. But if that’s all you’re doing, he suggests, you’re walking into danger.
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