We don’t get sucked into bubbles – do we?

“The biggest bubble since the TNT bubble WILL BURST”

The Biggest Bubble is about to burst

There is a big bubble in investments and investors are doing nothing

We know the party is over

We know the bubble will burst

The only thing we don’t know is when

Introduction

Of course rational investors don’t create bubbles:

Tulip Mania 1636 – 1637 Wall Street 1927 – 1929 Japan 1982 – 1989 Dot Com 1997 – 2000 US Housing Market – 2007 – 2008

“At the peak of tulip mania, in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman. It is generally considered the first recorded speculative bubble”

Investors are swayed by recent events i.e. investors are not rational and make decisions based on biases, not logic……

Why bubbles?

Why bubbles?

Over optimism – people believe they are better than they really are

Illusion of control – people believe they will know when to get out

Self serving bias – people believe what they want to believe

Inattentional blindness – people don’t pay attention to what they are not looking for

Blindness

Investors have risk aversion, everything we are told tells us that cash and bonds are safe assets

We are told that equities over the last ten years have underperformed equities

Retirement forces us to move to safe assets where there is no risk

The Facts

Bubbles are a by product of human behaviour, they have the same pattern Change in circumstance – internet creation

Credit creation – finance available

Euphoric – mania

Financial distress

Revulsion

They will continue to happen because its who we are…

The Facts

FT Money – investors are in no hurry to rotate from bonds to equities

You Gov Survey shows 71% of those asked wouldn’t be prepared to take any risk with their money

Bonds have delivered over the last ten years but growth does not correspond to the gilt yield, it will correct

The Facts

Actual returns over last ten years – FTSE All Share 132%, Gilt Bonds 49% and Gilts 56% - have bonds out performed equities?

Difference is that equities have been more volatile than bonds but that could change

Cash is DEAD and there is no life support machine for some time to come

The Facts

Cash:

Between 1992 and 1997 inflation was 14.9%, the Halifax Liquid Gold account paid 16.4%

Between 2007 and 2012 inflation was 16.5%, the Halifax Liquid Gold account paid 0.8%

Interest paid to savers fell by £5 billion in the last five years and will keep on falling

Interest rates are unlikely to change until 2017 and the banks will not be in a hurry to pass those increases to savers, so savers have to accept a long period of poor rates

The new BoE Governor has clearly indicated his focus is on growth and not inflation, inflation is only going one way

Cash can no long be seen to deliver income and inflation protection

Inflation, inflation, inflation

Maybe 30 years ago we reached retirement and died, this is now unlikely to happen

Average person will live twenty plus years in retirement

Investors need to stop being sheep

Retirement, Retirement, Retirement

2012 equity funds suffered outflows of Eur 6.8 billion

Bond funds took Eur 176.5 billion in 2012, highest level since 2007

In fact bond funds captured 10 times the inflows in 2012 than they did between 2007 and 2011 combined

Be a contrarian investor

THE PARTY IS OVER – but investors are reluctant to leave

Investors are fearful to leave the bubble they are sitting in – the bubble is one of risk aversion

Its not if, its when the bubble bursts and it will be messy

Be a contrarian investor

Investors have to accept they are all ready taking a risk with their money

Crucial that assets are diversified

Important that investors don’t follow the herd and look harder and deeper to get growth and income

Investors need to accept changes to retirement and that investing is a lifetime option

How to react

Research, research, research i.e. investors shouldn’t just accept an investment, they should break it before they invest in it

Consider globally away from the noise – consider changes to political landscape in Japan, what does that mean are there opportunities. If global bonds are dead where are there options for bond investments. Emerging markets is China really dead or is there more to come. Resources what will be the winners for example agriculture etc etc etc

And finally be contrarian, be brave and hold your nerve

How to react