Page 20 - DIY Magazine September 2018

WE’VE ALREADY STARTED TO SEE THE SECTORS THAT DID WELL UNDER QE (BONDS AND GILTS) STARTING TO UNDER-PERFORM
That means that together the European Central Bank, Bank of England, Bank of Japan and Federal Reserve have spent over £10 trillion trying to stimulate the global economy by pushing up the price of bonds so that the yields (returns) fall.
That’s an enormous amount of money; the current population of the European Union, the United States and Japan is still less than a billion people. That means that the total asset purchase program equates to more than £10,000 per person in those regions.
When you take that into account it’s hardly surprising that there’s been a long period when bonds and gilts have been going up in price and interest rates have been at record lows.
We’re now heading into a phase where the amount of stimulus has stopped going up and started to fall; if other central banks follow the Fed, and stop reinvesting when their bonds mature, then we’ll end up with Quantitative Tightening.
At the same time central banks are starting to raise interest rates; there have been several increases in the US and one in the UK, more will follow.
There is a direct relationship between bond prices and interest rates; simply put, if interest rates go up then the yield on bonds needs to go up (why buy bonds when you can get a better return from the Bank?). For bond yields to go up, their prices have to fall - as I mentioned earlier, we’ve already started to see the sectors that
did well under QE (bonds and gilts) starting to under- perform.
The future does not wait, just because we are not ready for it, change happens whether we want it or not, so now is the time to fire up the Quattro and make a tactical retreat.
To address the changing environment, all the sectors are having their volatility calculations reassessed and the ‘Slow Ahead’, ‘Steady as she Goes’ and ‘Full Steam Ahead’ groups will be re-formulated according to their Vindex ranking.
This will mean that some sectors will move up, and some will move down, but at the end of this manoeuvre it should mean that the groups reflect what we are seeing around us now, rather than how things were in the past.
If we then establish that sectors in the ‘Slow Ahead’ group are no longer going to give us the levels of return that we were seeing a couple of years ago, then that will also mean that our algorithms will have to be tweaked to realign the pie-charts to reflect these changes.
We will review the rules for our Tugboat and Ocean Liner and are considering trialling a Speedboat portfolio; this could also invest in Investment Trusts (ITs) and Exchange Traded Funds (ETFs). We produce the information for these funds on a weekly basis anyway and many of our subscribers, including myself, invest
in this arena. This will get discussed more fully over the weeks to come.
I will leave you with this thought. As you get older you acquire silver in the hair, gold in the teeth, crystals in the kidneys, sugar in the blood and iron in the arteries. Who would have ever thought that you could accumulate such wealth?
Best wishes and good investing, Douglas
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DIY Investor Magazine | Sep 2018 20