By: Tim Bennett
01.02.2019
01.02.2019
After a tricky end to 2018 for equity investors, Tim Bennett highlights some key concepts that should underpin your approach in 2019.
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Three key words for equity investors in 2019
Last week, I looked at how cash dominated the performance tables towards the end of 2018 and asked whether it is likely to continue to do so. This week, I look at three key words that should underpin an investing approach as we head into 2019.
Background
2019 was not easy for investors in either equities or bonds. However, it would be easy to allow that fact to overshadow the right approach going forward. Whilst caution is wise in a trickier equity market, it should not be the only watch-word. This week, I take a look at three; uncertainty, liquidity and opportunity.
Uncertainty
As 2019 came to an end, it felt as though equity markets finally work up to the many risks that face the global economy and financial markets. Whilst Brexit remains the obvious, and perhaps the largest, for UK investors, it is far from alone.
However, whilst these factors add up to a pretty gloomy collection, for long-term investors with a sanguine eye on stock market history, there is opportunity here too. In order to take advantage though, investors will need to be on high alert for a factor that could sink any investment strategy in this nervous climate – liquidity.
Liquidity
Put simply, liquidity is the ability to stay solvent in even tough conditions. It applies equally to individuals, companies and funds, albeit the concept is slightly different in all three cases..
For individuals, the key is to maintain sufficient cash to avoid panicking when things go wrong or having to sell long-term assets to meet a short-term need. That’s why we put a big emphasis on preparing rainy-day funds and positioning portfolios to meet foreseeable calls on capital.
For companies, the trick is to make sure they are not running too much aggressive credit risk and are managing stock and receivables levels correctly. I cover this in more detail in the red flags section of the Killik Explains library.
Funds face a slightly different challenge when nervous investors all ask for their money back at once, in the so-called “rush for the exit”. This is a particular problem for open-ended funds as they have to sell assets to meet these redemption calls. So now would be a sensible time to review liquidity levels across fund holdings. It is also worth noting that closed-ended funds do not face the same issue thanks to the way they are designed and you can often achieve a very similar underlying investment exposure this way.
Opportunity
As Warren Buffett has put it, you don’t buy less food when it gets cheaper. Investors could benefit from a similar mind set and try to be “greedy when others are fearful”. After all, the dividend yield on the FTSE All-Share is pretty decent right now and well above the equivalent yield on either government bonds or cash. For some investors, this is a buy signal.
Prepare rather than predict
The key in 2019 then is to organise yourself so that you are not caught in a liquidity trap, either in terms of your own position or the investments you hold, and then to hold your nerve as opportunities arise. This is easier said than done against a backdrop of big hedge funds struggling and some famous names being brought down a peg or two. Many investors will think, “well, if they can’t make money, how can I?”. However, this is the wrong approach as a long-term buyer. Markets like this always weed out the hot money and leave the field more open for careful, rational, cool-headed players. These folk rarely make the headlines because their approach is systematic and logical – dull, in a word! But that, as Nobel prize-winning economist Paul Samuelson once noted, is a good thing.
Conclusion
In a nutshell, make sure you are planning your cash flow requirements properly, maintain adequate diversification across asset classes, geographies and sectors and are constantly bouncing ideas around, whether with another family member, or an adviser. In tougher market times, it’s sometimes good to talk!
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