x Abu Dhabi, UAEMonday 22 January 2018

Diversify assets so they don't all dip at the same time

Fiscal View Let the experts do the work. They don't always get it right, but they are likely to do so more often than you.

I wrote my last column from the sublime sanctity of a Provençal village, where a lack of internet and television, thankfully, cut me off from the world's collapsing equity markets. For three days, I was oblivious to it all and missed the FTSE100's worst five-day performance since 2008. Now I am in the UK and back in the thick of it. Markets continue to be volatile, rising and falling erratically as, first the bad news, and then the good news emerges.

In the past week, markets responded negatively to a downbeat speech by Ben Bernanke, the US Federal Reserve chairman, at Jackson Hole, Wyoming, where he failed to give more commitment to quantitative easing. This is the dubious mechanism by which the government injects liquidity into the economy by printing money and buying back its own bonds, or treasury bills, that are held by banks. I have always thought this to be a curious way of stimulating spending since banks are reluctant to lend the money. Surely it would be more efficient to drop dollar bills from the sky by helicopter.

They also responded badly to poor economic data, the potential impact of Hurricane Irene and the European debt crisis. Share prices fell dramatically and gold rose to a record high of US$1,911 (Dh7,019) per ounce as investors could see no hope in the short-term recovery of markets. But by the end of the week, the picture was very different.

Firstly, and importantly, I was invited to visit Old Trafford to watch Manchester United trounce Arsenal 8-2. This may not have had a great effect on world equity markets, but it did boost my interest in all things positive. Life was good and surely the rest of the world would follow. And so it turned out to be.

Data on US consumption confirmed that consumers were starting to spend again, two of Greece's largest banks announced they were solving their cash problems by merging, courtesy of Middle Eastern finance, and President Obama said he would put forward proposals to boost job creation.

The FTSE100 bounced back 2.3 per cent and now stands at 5,243, almost identically equal to the value, three weeks ago, that I observed in my Provençal hilltop village. Gold dropped $200 an ounce as analysts started to believe that equity markets might soon start to recover. The conclusion seems to be: you can scour the newspapers intensely; watch the markets avidly; panic as they move up and down; or you can relax euphorically in Provençe or at a Manchester United football match, and the end result will be much the same.

On a day-to-day basis, equity markets are volatile, but for the average investor who is interested in long-term growth, there is no need to worry about the very short-term performance.

With markets performing the way they do, there is little point - for the average investor - in trying to make a quick buck by guessing day-to-day movements. You can, in fact, make money on short-term performance, but it requires a great deal of skill and the ability to trade very quickly.

If you want to make money in this way, you should set up an online trading account or, preferably, invest in a fund that specialises in short-term performance. Let the experts do the work. They don't always get it right, but they are likely to do so more often than you.

AHL Diversified PLC by Man Investments is a successful trend-following fund that has averaged 16.2 per cent per annum with only one negative year since its inception about 20 years ago. On the other hand, IQS Performance Fund is down 42 per cent this year after an increased performance of 72 per cent in 2010.

Neither should you put all your eggs in one basket by trying to guess the asset class that will perform best over the next few years. Gold has returned nearly 540 per cent since 2001, when Gordon Brown had the not-so-brilliant idea of selling off the UK's national reserves. But, last week, it dropped by $200 to $1,700 per ounce when analysts thought equity markets were about to take off. Emerging market equities have proven to be one of the best asset classes over the past 10 years, but, in this period, have sometimes been bottom of the pile with the lowest annual performance.

The best strategy for the average investor is to spread your money across different asset classes in the belief that in the long term they will all rise. But, more importantly, that in the short term, their performances will be, to some extent, uncorrelated, such as when one asset class is falling, there is a chance that another may be rising.

This strategy will not provide you with the highest possible gain, but it will reduce volatility in performance and give you a good risk-adjusted return - a good performance in relation to the risk that you have taken. It will also reduce anxiety and enable you to relax in Provençe totally cut off from the rest of the world, or delight in Arsenal's humiliation. Magic.

Bill Davey is a wealth manager at Mondial-Financial Partners in Dubai. If you have any questions about this column, contact him at bill.davey@mondialdubai.com.