Life and investing were all hunky dory before Covid, weren’t they?
2019 saw US equity returns of 31%, the World ex-UK index returned 22%. Bonds (Global Aggregate Bond Index) rose 6.8% and commodities 7.7%. The Fed was even cutting interest rates at this time, stimulating more borrowing, resulting in more purchasing, manifesting itself as more growth!
It feels like we should have been celebrating in the streets.
Maybe that is a little farfetched. The uncertainty of our old homeland breaking off from the EU, and the political scene in the US was, well, tense. That put a stop to getting out the bunting and cheers’ing to another positive year of growing portfolios.
Today, the economic picture isn’t as rosy. Rising prices (inflation) are causing consumers to think twice before splurging. This knocks on to recession concerns as we tighten our purse strings at home and businesses pause for thought before spending.
It’s been a tough time for investors in 2022 so far, and there appears to be nowhere to hide!
Quarter 2, 2022 By Numbers
Global equities, as measured by the MSCI All Country World Index (USD) fell by 19.97%YTD.
Within the world of bonds, the Barclays Global Aggregate, which is an index comprising global fixed income; government bonds, corporate bonds, other asset back securities; mortgages, and car loans, finished the Q2 down just over 9%.
USD continued its strengthening trend against most global currencies, as the Federal Reserve leads the way in interest rate hikes and growing recession concerns bring uncertainty which generally strengthens USD.
And holding all your money in cash is signing up for losses of 8-9% (the level of inflation).
The Case for What’s Good
It’s not all doom and gloom though, there are some positive economical signs – although you may not hear about them as much;
- Global stocks have already fallen double digits, already pricing in a lot of bad news.
- Falling inflation, which appears like it’s coming, would change central bank policy on rising interest rates. We may start to hear some concrete soundbites of when interest rates will come back down.
- There are currently more job openings than unemployed people – that’s the case in a number of countries; US, Germany, and the UK.
- Wages are going up, so the employed population isn’t feeling the full effect of inflation.
- We haven’t seen excess in construction or investment that have preceded previous deep and prolonged recessions.
- It’s not as dire out there as a lot of people say.
The Case for What’s Bad
- New mortgage applications have fallen sharply.
- Economic growth is slowing – although we don’t have ‘stagflation’ as some may suggest – as unemployment numbers are not high. In fact, they’re the opposite.
- Consumer confidence is low, leading to less spending.
- The war in Europe continues to add to an unpredictable amount of uncertainty.
How Should We Weigh the Good Vs Bad?
Our remedy is to act continuously on a rational plan—as distinctly opposed to reacting to current events. This offers you the best chance for long-term investment success.
If your future plans have been affected, review how this change may or may not impact your plan, then adjust the investments accordingly.
Turn a blind eye to those who profit from the allure of what’s wrong with the world –the news cycle reinforces uncertainty.
Continue to maximize contributions to 401k’s, take advantage of topping up your UK state pensions, and -vif you have excess money in cash on the side – look to invest whilst everything is on sale!
This too shall pass.
Plan First Wealth Managing Money
Here’s a summary of the discussions and changes made by our Investment Committee over the past quarter:
- Continued monitoring of the PIMCO Global Credit Fund in overseas pension accounts
- Developed PFIC free portfolios for overseas pension accounts (PFIC = passive foreign investment companies)
- Ongoing discussions on Fundsmith following their section 166 – no changes to be made at this time
- Spoke with fund managers at PIMCO to discuss our various holdings, their outlook, and explanation of relative performance YTD.
- Made a change to the bond allocation in our PFIC free portfolios.
Our Strategy Deep Dive
At PFW our portfolios are characterized by massive global diversification across geography and asset classes. We invest in equity mainly via passive index funds, construct our portfolios with cost in mind, and design our portfolios and your investment plan to hold up in both good times and bad.
Total Return I USD (TR1) – SIPP/QROPS Pensions.
We have 9 risk-adjusted strategies, TR1 is number 6 of 9 (1 = low risk, 9 = high risk).
Where Is This Invested?
- 61% in global developed market equities and bonds, mostly held in tracker (ETF) funds.
- 34% in global government and corporate investment grade bonds and debt
- 5% in cash.
Q2 2022 performance of Total Return I USD = -12.34%*
YTD 2022 performance of Total Return I USD = -18.68%*
1-year performance of Total Return I USD = -16.81%* (July 1 2021 to June 30, 2022)
*Past performance is not an indicator for future return. The return is net of a management fee of 1.25%. This does not include any trading fees.
This portfolio is trailing the performance of an equal-weighted portfolio made up of global equities and global fixed income, also known as the portfolio’s benchmark.
We can attribute that to the PIMCO Investments Grade Credit Fund that is held in this portfolio. It’s a higher-risk bond fund that has experienced greater volatility YTD. When viewed over a longer time horizon the greater volatility has generally yielded a higher return on the way up and lower on the way down. We continue to hold this position in our portfolios.
Fundsmith has experienced a similar story over the quarter and year so far. It is underperforming relative to the MSCI All Country World Index (USD). Historically this volatility has yielded significant growth over the index. We continue to hold this position in our portfolios.
Our ‘General Principles’ to Investing
You and I are long-term, goal-focused, planning-driven equity investors. We’ve found that the best course for us is to formulate a financial plan—and to build portfolios—based not on a view of the economy or the markets, but on our most important lifetime financial goals.
Since 1960, the Standard & Poor’s 500-Stock Index has appreciated approximately 70 times; the cash dividend of the Index has gone up about 30 times. Over the same period, the Consumer Price Index has increased by a factor of nine. At least historically, then, mainstream equities have functioned as an extremely efficient hedge against long-term inflation and a generator of real wealth over time. We believe this is more likely than not to continue in the long run, hence our investment policy of owning successful companies rather than lending to them.
We believe that acting continuously on a rational plan—as distinctly opposed to reacting to current events—offers us the best chance for long-term investment success. Simply stated: unless our goals change, we see little reason to alter our financial plan. And if our portfolio is well-suited to that plan, we don’t often make significant changes to that, either.
We don’t believe the economy can be consistently forecast, nor the markets consistently timed. We’re therefore convinced that the most reliable way to capture the long-term return of equities is to ride out their frequent – but ultimately temporary – declines. As Peter Lynch says, “The key to making money in stocks is to not get scared out of them.”
The news cycle reinforces uncertainty. We believe that uncertainty – in the markets and indeed the World – is the only certainty. We don’t seem to move from periods of uncertainty to periods of certainty; rather we move from one uncertainty to the next. Thus, we encourage our clients to embrace “rationality under uncertainty.”
The performance of our equity portfolios relative to their benchmark(s) is irrelevant to investment success as we define it. (It is also a variable over which we ultimately have no control.)
The only benchmark we care about is the one that indicates whether you are on track to achieve your financial goals.
Join the Plan First Wealth Hub Community
Plan First’s WealthHub is a community of Brits living in America looking to protect and grow our life’s work, retire with confidence, and leave a legacy.
Our members get:
- 2 updates per month in your inbox delivering timely and actionable content (articles, papers, podcasts, videos, etc.)
- Access to a private Facebook group where you can connect with other Brits living in the US—as well as experts in finance
- Access to exclusive monthly online educational events such as workshops, expert AMA’s, and webinars
Plan First Wealth is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.