Keeping your head in markets
WADING your way through the extraordinary noise that is financial markets at the moment is an interesting experience.
‘Will coronavirus hit my finances?' and ‘will Brexit trash the economy?' are two common questions from investors worried about losing large amounts of capital from their pensions and investments.
It isn't always a pleasant investment world and it isn't always an honest one, and fear is the greatest tool in making your opponent weak, because fear weakens us all.
‘When all around you are losing their heads' is a line I've used many times in this column over the last twenty years, and this one is equally as relevant.
First of all, avoid noise. I've seen journalists/news anchors in CNN/CNBC quote the fall in the Dow for example. The Dow is as useful as measuring a stock market as a single sheet of toilet paper in drying up the Pacific Ocean.
Carry on if you want, but I'll read the Beano.
The Dow is a measure of just 30 stocks. Just 30! It is exceptionally concentrated and no measure of a stock market, let alone an economy.
You are better looking at the Wilshire 5000 or S&P 500, or Russell 2000 as a true measure, as they give a correct broad spread.
The Dow Jones doesn't add in dividends which would have its value well in excess of 500,000 as opposed to the 26,000 today.
Due to the most extraordinary daftness in its calculation, you don't see the true change/alteration in a company's value.
For example: two companies valued at £100,000 issue shares. One issues ten shares (so £10,000 a share) and the other issues one hundred shares (so, £1,000 a share).
If they both rose in value by 10 per cent, one shows a £1,000 (10 per cent) increase in value on the Dow, and the other shows an increase of £100 (1 per cent) in value on the Dow, yet both companies' overall value has increased by 10 per cent.
It's brutal in its inaccuracy, so why quote it? I could go on for a while.
I know they don't pay news anchors to think, rather, they read out what's put in front of them, but anytime you see it quoted you can be rest assured there are better columns, or TV programmes you can be watching to make your financial decisions.
Often in difficult market conditions companies can use the downward sentiment as an opportunity to dump bad news that has been brewing for a while, exacerbating sentiment and creating further panic. There is countless evidence of this at the moment that is unjustified.
Similarly, such bad news, is great news for short sellers.
Short sellers make money betting on stocks falling. The more the volatility, the more they gain, so financial noise around such stocks can lead to short term negative sentiment that panics investors to sell their portfolios, just for the aforementioned to become long sellers i.e. they buy them and make money from your cheap sale price.
There is no bell rung at the top or bottom of stock markets, and markets are never ‘going' up or ‘going' down. They are where they are at that time.
Such a belief will force you to sell your investments cheaper than they are where the hedge managers above benefit.
The second a market falls you will be selling at the next available price, and often the rebound is quite quick and you will miss that price, instead selling low and then repurchasing high.
I'll cover coronavirus' impact on the markets next week, but for this one can I just say as I've done for many years, that diversification in your pensions or ISAs is where you should be positioned.
An example of that is in our portfolio where we have BH Macro as a diversifier in difficult markets.
In today's markets so far on the day: S&P down 1.68 per cent, Russell 2000 down 2.17 per cent, Wilshire 5000 down 1.78 per cent, BH Macro up 0.37 per cent.
A correctly negatively diversified portfolio will do just that and throw out stabilisers when seas become tricky.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a financial query call Darren McKeever on 028 6863 2692, email email@example.com or visit www.wwfp.net.