As we are now into 2014 and will soon be busy diving back into whatever projects we had started before the holidays, it is a good time to reflect on how things went in our financial lives this previous year. More importantly it is a very good time to look at what kinds of challenges and opportunities the coming year may bring, and try to reduce the likelihood of being caught off guard. I do believe this is likely to be a very interesting year ahead but also one fraught with danger.
As we saw developed world stock markets soaring to new highs last year, a question many are asking is if this year will see similar performance. Unfortunately the main support driving prices higher has been the central banks of the world printing money, and this is expected to taper off over the coming twelve months. As we have never been in a situation of five years of near zero interest rates and massive monetary stimulation, there is a good chance that the removal of that support could very well see the bottom fall out.
As for the bond market, this has been teetering on the edge of a cliff for quite some time now, and investors in this asset class have been essentially picking up dimes in front of a steam roller. One good thing for bonds is that the Fed has promised to keep rates low until at least 2015, however the markets may respond sooner than this if they see the writing on the wall.
While I see much danger in both stocks and bonds at current levels, I do see this as the makings of a coming opportunity for those who are patient enough to wait until everyone else panics, as this will certainly create some amazing buying opportunities. At the moment cash has been receiving a negative real return, but it still in my opinion is a safe place to wait for these opportunities to present themselves.
Alongside cash I see trend following CTA funds (commodity trading advisors), who have not fared very well for the last five years as a group, as a safe way to hedge exposure in stocks and bonds. If the stock and bond markets continue to tick over for another year, hedging a portfolio with trend followers (who typically do best in times of high volatility and panic) is a way to participate without fear that all will be lost when we eventually reach the next inflection point.
Picking tops and bottoms in the markets is a losing game, so I would recommend the best way to preserve and grow wealth in this environment is to diversify and balance your portfolio as mentioned above. I am favouring an asset allocation of 25-40 percent split between equities and bonds offset by an equal amount spread across a few trend following funds with long track records (15+ years). The remainder is best left in cash so that if either the stock or bond market do see a panic there is ammunition to pull the trigger when the bargains are there to be had.
David Mayes MBA provides wealth management services to expatriates throughout Southeast Asia, focusing on UK Pension Transfers. He can be reached at david.m@faramond.com. Faramond UK is regulated by the FCA and provides advice on pensions and taxation.
