As investors we’re constantly told that ‘markets can go up as well as down’. But if you’ve forgotten the last part, it’s probably because 2017 was a year of almost all up and very little down.
Not only did most stock markets hit new record highs, they did so with very few shocks along the way.
It was a year in which the dogs didn’t bite – or even bark – for that matter. Despite all the dramatic headlines around the Trump presidency, Brexit negotiations and North Korean sabre rattling, concerns over political risk were never realised.
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And for the most part, markets seemed to hold their nerve with Wall Street’s so-called ‘fear gauge’ – the Vix (Volatility index) ending the year at its lowest point on record, reflecting the calm conditions enjoyed by investors.
But there’s no guarantee that this year will be more of the same. With the era of abundant liquidity and cheap borrowing coming to an end, the spectre of inflation and further political worries on the cards, volatility may very well return with a vengeance.
Ask the experts and they’ll tell you that a slice of 2018’s returns was brought forward into 2017 – so don’t expect markets to keep on delivering the goods.
With investment, much like any other aspect of life, it’s always sensible to hope for the best, but plan for the worst. If you’re nervous about markets suffering a wobble, or nearing a bubble, here are four ways to batten down the hatches.
The MSCI World index made up of the developed world’s major stockmarkets has risen strongly since a late 2015 and early 2016 dip
1. Prepare for a sideways market
With the bull market nearing its ninth anniversary – making this the second longest bull market in the post-War era, beaten only by the tech bubble of the late 1990s – unsurprisingly, investors are getting nervous that it could all very soon end in tears.
But what if it doesn’t all end with a ‘pop’? What if markets simple trundle sideways? These types of crab-like markets are quite common and can persist for some time.
Unlike most rising markets, this bull market hasn’t been pushed higher by investors’ fear of missing out. With the financial crisis burnt into memory, it has been investors’ fear of losses, rather than their desire not to miss out on gains that has fuelled the market.
When markets move sideways, there’s a strong case to be made for stock pickers, whereas you don’t want to be invested in a passive fund going nowhere. The game is firmly in the hands of those who can roll up their sleeves and identify mispriced stocks.
Names like Dan Nichols of the Old Mutual Smaller Companies Fund or Jeremy Podger of the Fidelity Global Special Situations Fund have strong track records in finding tomorrow’s winners.
The UK’s main stock market indices have climbed since the financial crisis slump
2. Don’t put all your eggs in one basket
Not to sound like a cracked record, but it is hard to overstate the importance of diversification in an investment portfolio.
Even against last year’s relatively calm backdrop, the gap between the best and worst performers was noteworthy. While emerging markets and Asia enjoyed stellar returns, commodities ended 2017 in negative territory, as the table below shows.
As the nine-year bull market grows long in the tooth, it will pay to have balanced investments. If you’re looking to build a regionally diversified portfolio, a global equity fund is a very good starting point.
Funds like the Rathbone Global Opportunities Fund, managed by James Thomson which has a heavy weighting in the US and technology stocks and the Invesco Perpetual Global Equity Income Fund, run by veteran fund manager Nick Mustoe, are worth exploring.
Figures on the right in this FTSE table show the maximum peak to trough drawdown in the indices over set time periods. The biggest over ten years covers the financial crisis crash
These FTSE figures show returns for indices each calendar year including dividends – investors have now had two decent years of return in a row
3. Keep calm and carry on
After the calmness of 2017, there’s a very good chance that volatility could spike in 2018. But it’s important not to confuse volatility with risk. Volatility, while painful, is not risk. If you’re investing for the long term, fluctuating markets along the way do not matter.
As bull markets mature, volatility tends to rise. But this doesn’t necessarily mean the bull market is over, although it does mean that the ride is likely to get bumpier.
As central banks start to turn off the taps of quantitative easing and start to raise interest rates, moving closer to so-called ‘monetary normalisation’, choppier market conditions are to be expected.
You could choose to sell your investments when volatility hits, but bear in mind that by doing this you’ll be crystallising any losses. Staying invested can give your investments the chance to recover and, of course, buying on markets dips means you get more assets for your money.
Investing in equity income funds like the JOHCM UK Equity Income Fund can be a good way of tapping into dividends, which can offer a buffer against market swings.
Maike Currie: If wage growth finally picks up we could also see an unexpected rise in inflation
4. Prepare for higher inflation
Wage growth has been paltry for almost a decade now, but if this changes we could see inflation start to pick up. Now might be a prudent time to add a bit of inflation protection to your investment portfolio.
Maike Currie is investment director at Fidelity International and the author of The Search for Income – an investor’s guide to income-paying investments.
The views expressed are her own. Follow her on twitter @MaikeCurrie
Gold has long been seen as a useful hedge against the wealth-eroding effects of inflation.
The Investec Global Gold Fund provides an effective way to gain exposure to the yellow metal via a diversified portfolio of gold mining company shares.
Co-managers George Cheveley and Hanré Rossouw can also invest in physical gold ETFs and companies which mine for other precious metals.
Alternatively, if you want to buy a slice of physical assets that could rise with inflation while still maintaining exposure to the stock and bond markets consider a multi asset fund which can blend equities and bonds with assets such as commercial property and commodities to cover most bases.
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