Wednesday 17 September 2014

The Art of Waiting, Volcanoes and Scotland

September has been a disappointing month so far, with a modestly downward trend in the DIY Income Investor portfolio. Consequently, there is little to do, other than to wait for something to happen.

While sitting and waiting, it is always tempting to speculate about what drives the markets but I suspect this is akin to trying to forecast when an Icelandic volcano is likely to erupt.

The thing about volcanoes is that the mechanics are pretty well understood but 'the experts' are still not able to predict accurately when there will be an eruption or how large this will be. Yes, they can monitor the seismic rumblings - and even the flow of magma - but how this will translate into actual fireworks is much harder.

For example, some 'experts' were recently predicting a massive eruption from the delightfully named Bardabunda volcano in Iceland - one that would disrupt air travel throughout Europe (like the 2010  Eyjafjallajokull volcano). That just didn't happen (the eruptions have been much more restrained - so far).

On the financial markets, the seismic rumblings associated with the Scottish independence vote (we're nearly there) might be a similar phenomenon. All sorts of dire scenarios of financial lava flows are being forecast in the event of an eruption  - sorry, a 'Yes' vote. But will the rumbling just die away in a few days?

Meanwhile, is there something deeper and more international at work? Is it related to ISIS, Gaza, Ebola and Ukraine - or possibly factors more basic? Continued low inflation in the UK lowers the expectations of an early interest rate hike - which should boost bond and share prices.

However, I wonder if we are just seeing the 'technical' signs of the start of a new 'school term' for the financial community, who now see more clearly the writing on the wall for the end of Quantitative Easing and who are looking at their portfolios (and bonuses) in a more critical (and defensive) light? Cash is king at the moment - at least cash hoarding seems to be the favoured strategy with companies in the developed world. At some point this cash will be spent, producing ripples in the financial markets.

The moral of this comparison between volcanoes and financial markets is that no-one really knows what will happen. All you can do is try to have a strategy that has at least some analytical basis, be as defensive as possible (without sacrificing your potential for up-side), cross your fingers and wait and see. The advantage of the DIY Income Investor approach is that waiting doesn't cost you money - the reverse, in fact: with an average yield of 5.8% on the portfolio, 'just waiting' is almost as good as cash (on a 5-year term with Ratesetter).

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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