In a crisis, it helps to have good counsel. Consider the following sage advice from investment strategist and financial advisor Mike Tyson:
“Everyone has a plan ‘til they get punched in the mouth.”
Or as German military strategist Helmuth von Moltke the Elder put it, somewhat more formally:
“No battle plan ever survives contact with the enemy.”
The enemy has been quick to show himself this year, in the form of a bear market, at least for stocks.
So the pragmatic response to this month’s volatility – if any is indeed required at all – is as follows:
1) Diversify by asset type.
2) Limit or eliminate exposure to emerging market debt. Raise cash rather than cling to a benchmark with no conviction (and no obvious value).
3) Concentrate any debt exposure to bonds issued by creditors, not debtors.
4) Limit equity exposure to high quality and inexpensive markets offering a ‘margin of safety’. (Most of the US market does not qualify in this regard.) Russell Napier recommends Japanese equities, currency hedged, and so do we. And in a bear market, you don’t want to own expensive growth, you want to own defensive value.
5) Complement traditional investments with alternatives. We would advocate systematic trend-following funds (which can profit in bear markets just as they did in 2008), and gold – the one form of currency that comes with no counterparty risk because it is the one asset that is no-one’s liability.
6) Limit your exposure to mainstream financial media, and especially to economists employed by commercial banks.