Riding the bull naked... How bullish can we afford to be?
We're sure you've all seen the numbers –over the very short term, markets have produced some impressive double digit returns in some cases. It has been a great wee run and investors deserve some good news. It's difficult not to celebrate by showing off 1, 3 and 6 month fund performance figures. Ok, so we know the numbers have hardly made a dent in investors' losses - but right now is a good opportunity to count some gains. We should all enjoy being able to report a little bit of success.
While the short term numbers smell of roses, we can't forget the thorns which still dominate the big picture. Just to play devil's advocate, this week we wanted to provide some interesting 'food for thought':
A quote from John Mauldin (well known investment expert and author of 'Absolute Returns')
"There has never been a time in history when P/E ratios are in the range they are today that ten years later investors in the broad stock market have made a penny. None. Nada. Zippo. Yet investors pile into the markets in a belief that the markets will behave in entirely new and different fashions."
A quote from George Santayana, 1905
"Those who cannot remember the past are condemned to repeat it."
7 thorns in the side of a recovery:
- Very high Price / Earning Ratios. (S&P 500 P/e 31 March 2000. 29.41. Today 29.46!)*
- Record US fiscal and government deficit
- Jobless 'recovery' financed by debt in the US
- The collapse of global trade talks and increased talk of protectionism
- Global exchange rate imbalances due to 'competitive' devaluations
- Property booms globally helping finance increased consumer expenditure
- Increasing and continuing geopolitical risks (North Korea, Iraq, Palestine)
Every single factor above runs the risk of causing shares to be lower over the mid to long term, so how bullish can we afford to be? Like you, we would love to see a sustained recovery in the markets, but can we really justify exposing investors to the potential of any further market shocks, without protection? Should they really be jumping on the bull and riding it naked?
Secondly, if we are on the way to a recovery, it may be erratic, painful, and marred by setbacks. That type of recovery results in erratic investor behaviour as they try to jump between trends, or time when to get in and out of the market (usually to their own detriment). With protected investments, investor behaviour is changed. Exposure is to the upside and not the downside. In today's market conditions, we think that's invaluable.
*Source: www.standardandpoors.com
