There's more to investment than Bitcoin
SINCE our last column, there has been only one big financial story (more of bitcoin in a moment).
Back in the traditional world of investments, there has been plenty going on. It looks like recent moves in markets may correspond with ongoing optimism about the roll-out and success of the Covid vaccination programme. And there are signs that the next US fiscal package is set for sharp upgrades which would have a positive influence.
We saw another rough week for safe-haven government bonds, which caused ripples through the capital markets and in turn took the wind out of the sails of the equity rally. Gold also continued its retreat, as it looks like higher real interest rates in the US will reduce its previously appealing “safe haven” status. The potential for increased risk and associated rewards are coming back into play.
Looking ahead, barring any major setbacks, the second half of 2021 looks set for a strong recovery.
Against all of this, everyone's still talking about bitcoin. Since our last column it has continued its remarkable upward trajectory.
The very visible arrival of Elon Musk on to the bitcoin stage attracted the attention of speculators, many of whom are dazzled, exhilarated and relatively lacking in knowledge – a potentially dangerous combination.
Readers of this column will remember that our team don't believe that bitcoin is worth holding in significant amounts. Its growing legion of evangelists however remain unperturbed.
Let's remind ourselves of some of the basic rules of investing. For the sensible long-term investor, most of the above market update is merely noise. We advise spreading exposure to capital markets through a diversified global portfolio, focused on medium term financial goals. Rule number one is simply maximising your time in the market: go long, not flash in the pan. Here's why:
Firstly, we cannot know the detail of what is going to happen next week or beyond. Anyone who says they can accurately predict the future should, frankly, be ignored.
Second, market prices reasonably accurately reflect what we all collectively know, think, fear and hope about that future. Be wary of those regularly offering “strong conviction” on future paths: there is rarely anything truly secret delivering an inside track. Rather, it is more likely to be a marketing tactic to attract attention – or unsubstantiated, uninformed internet commentary. When it comes to finance, there's good reason to trust the professionals.
The third assertion is that humankind will continue to invent new things and better ways of using them. Productivity and innovation are the engines of economic growth and future portfolio returns. There can be no guarantee that our species will continue to invent new and amazing technologies or indeed that we will learn how to adapt them to drive future profits growth. However, history gives us reasonable cause for optimism.
If you are wondering when to invest, the answer is always “now” because that simply gives us more time in the market and therefore more time exposed to future potential innovative breakthroughs. Ensure global diversification. And if you want to dabble in opportunities here and there to add value, be very selective and don't be tempted to go it alone: get the help of someone with experience of doing this as their job.
It could be argued that bitcoin potentially challenges some of our assertions.
While there are times when emotion and hype get in the way of cool calculation, it is the gravitational pull of intrinsic value that is inescapable over time. This intrinsic value is hard to locate for bitcoin, given the absence of dividends, cash flows or coupons. The surrounding hype should be setting off alarm bells for hard-nosed realists.
On the other hand, the technology underpinning bitcoin is very interesting: blockchain, as an innovation, has widespread and as yet untapped uses in the wider economy. There is definitely more to come on this front, but it's the technology rather than the virtual currency we should be looking at.
New technology is not always easily assimilated into the wider economy; it often takes companies and consumers decades to work out how best to adopt it.
We stick to our advice to get invested in a diversified, mixed portfolio, as soon as you can, and with what you can afford. Cool heads will remember that investments can decrease as well as increase in value. Ignore the headlines. Rational optimisim about the future is one thing; blind faith is another.
:: Cahir Gilheaney is a wealth manager with Barclays Wealth & Investment Management team in Belfast