The prime minister has a question for Frances Urquhart. ‘If I were captain of the Titanic, which of my senior officers should I be worried about?’
It’s a trick question, but Frances already knows the answer.
Frances replies, ‘Beware of an old man in a hurry.’
He is, of course, referring to Lord Billoborough. The prime minister’s closest adviser. The man with less time left on his hands.
Frances Urquhart, House of Cards. Source: BBC
I was reflecting on this the other day, considering the most pressing concern in investing: your time horizon.
Investing in quality companies in the markets is like planting a tree. It’s going to take some time to see fruit. And some time to see growth.
As people near retirement, the main fear I hear is drawdown.
‘What if…?’ the crackly voice asks down the phone.
What if we get another market crash like 2008? Or a shock like Covid 2020, where values fall 35% or 50%? Will you have enough time to recover?
The good news is that recovery from market drawdown seems to be getting swifter.
The FTSE 100 — the British index I watch — is back above 7,500.
Back to where it was before the pandemic:
Source: Google Finance
The bad news is swift recovery is by no means guaranteed. And in this case, the reason for swift recovery was government ‘money printing’.
Money printing inflates markets with debased money. People become concerned their dollars or pounds or euros are worth less. The bank pays them little to no interest.
So they want to ‘put their money to work’.
Money floods into the markets, as we’ve seen lately. Or into property markets, where worryingly it is often supported by lending at cheap rates. Initially cheap rates.
But history tends to suggest that times of inflation do not end well. Stock markets stagger, though do recover. Property markets crumble, and recovery for them may take many years.
What about alternatives?
So, investors ask this question: ‘What alternative assets can I invest in that are not correlated to public equity or property markets?’
There are some alternatives:
- Classic cars
- Cryptocurrency (maybe)
- Fixed interest
- A private business
The problem with most of these is the unintended consequences they give rise to.
Gold has no yield. Your money is locked into solid metal without any ongoing return. While gold has historically held its value, it too recently stumbled at the outset of the coronavirus crisis. Though it did have among the lowest levels of drawdown.
Classic cars and art have no yield and will need maintenance and insurance.
Cryptocurrency is not based on any hard, underlying asset. Any investment in them is a speculation on their ongoing demand, limited supply, and (for now) lack of regulatory control. Their risk profile could be extreme.
Fixed interest, bonds, mortgage securities, and so forth can provide stable yields and even growth in certain situations. But in times of inflation, they are threatened with erosion.
A good private business can be a fine investment. But you need the skills, resources, and time to manage it. Which often defeats the purpose of being a passive, retirement option.
The bottom line
There is no perfect investment.
No simple answer.
You need to get advice from an independent and experienced professional to look at your unique situation.
- I’m comfortable with stocks
- I’m willing to ride out drawdowns
- I like dividend income because it is highly passive
But I’ve been investing in stocks since I was 17, so I know the landscape.
Still, I am under no illusion that a major global crisis could wipe out stock market wealth at record levels.
This world is a volatile one.
The one free lunch that is available in finance is diversification.
Diversification into a range of stocks, sectors, and countries.
And diversification beyond stocks into other asset classes too.
I’m getting older. And so are you. The key is to be in no hurry.
Editor, Wealth Morning
(This article is general in nature and should not be construed as any financial or investment advice. To obtain guidance for your specific situation, please seek independent financial advice.)