As we make use of physical newspapers less and less, there are several services that will filter global news from all the various websites and prepare a reading list focussed on your specified interests. This is a very convenient way to keep up to date on the topics that you care about. But lately, I’m finding that my newsfeed seems to only be giving me things to worry about.
Below are just a few examples of what kept me awake last night.
Yellen says Biden budget raises US debt-to-GDP ratio but is responsible (Reuters)
Wow. The ratio is sitting just over 100% already. While it is no surprise that we got here – Congress’ overspending (budget deficits) combined with tax cuts has been pushing the debt ratio up for several years now. What surprised me is that Janet Yellen, usually quite conservative, described this as both “responsible” and “affordable” due to low inflation and Treasury bond yields. If you had to bring this closer to home, no one can argue that having more debt than what you produce is either responsible or affordable.
Powell gets his inflation wish (Wall Street Journal/WSJ)
The Wall Street Journal reports that Federal Reserve Governor Jerome Powell wanted higher inflation. Well, he got it…and then some! US Consumer Price Inflation jumped to 4,2% in April. Again, not a big surprise. Pumping trillions of dollars into the system at record low-interest rates will do that. Both Powell and Yellen seem to be quite blasé about rising inflation at this stage, using words like “transitory” in almost every press release. We are not convinced that what we are seeing is temporary. Commodity prices are on the rise, global minimum wages are increasing, real estate prices are on the up, food prices are increasing, the list goes on. So, when we read this together with the Yellen/Reuters headline, we get very nervous.
The price of breakfast: Soaring costs bolster fears of global food inflation (Financial Times/FT)
The Financial Times reports that prices for bulk contracts of coffee, milk, sugar, wheat, oats and orange juice have jumped 28% on average from 2019 levels. If your breakfast is all about the bacon, you can increase that number to 32%. These increases represent the raw cost of these items and do not account for the rise in the cost of delivery, processing, packaging, etc.
The World Bank reports that the number of countries facing acute food insecurity is on the rise. The problem is exacerbated by climate change, international trade tensions and growing conflict.
I could go on, but I think you get the point – things are going to get tougher. The world seems to be in denial about the economic reality that is just around the corner. Combine vaccine euphoria with several developed countries coming out of lockdowns, and you see an increase in consumer spending and optimism levels rising. This environment usually encourages investment, often in risky assets to chase higher returns, and we are concerned that investors may be in for a shock.
The bottom line is we cannot stop investing or move our savings into cash to try and avoid any coming market shocks. So, what should investors be doing instead?
The good news is that you can make some tactical changes to your overall investment portfolio to provide some level of protection. We do not recommend that you make drastic changes, but a good advisor combined with a solid investment manager will have some advice for you on how to change the asset allocation in your personal portfolio to get you through different investment cycles.
Diversification is key. Investing is not just about achieving high growth on the stock market or protecting your savings by being in cash. There is a myriad of other products and asset classes in the middle that can provide a wide spread of de-correlated portfolio. In fact, if you are invested in a well-managed balanced fund, your fund manager has most probably already made the necessary changes to your portfolio.
Lastly, brace yourself. I can guarantee that sometimes it will be ugly. Even if you are invested in a well-diversified portfolio, any exposure to the stock market will mean short term losses from time to time. Do not panic when the stock market and currency movements wreak havoc in your portfolio. Provided your investment strategy was well thought out and customised to your particular financial situation, all you can – or should – do at times like these, is stick to the plan.
If you do not have a plan, speak to a financial advisor, and take control of your finances … and let them worry about those scary headlines!