If you are looking for something to cheer you up, don’t watch Songbird, the latest in an outbreak of pandemic-themed movies.
The film is set in 2024 when the coronavirus has mutated into Covid-23 and those infected are taken to concentration camp-like quarantine zones.
History is full of anecdotes of people burying the family silver in their garden or carrying gold bars or coins in wallets — just in case. In one part of Songbird (spoiler alert), cash stashed in a brown paper bag hidden at home pays for a fake immunity band on the black market.
As investors, we are told to “buy when there’s blood on the streets” and be “greedy when others are fearful”. Investing is an optimistic behaviour — why invest if you do not think your money can grow, even in the direst circumstances?
On the other hand, it can pay to be defensive and plan for the worst, at least with some of your life savings, and especially if you think we may be heading for a multiyear pandemic.
History and the regulator tell us that past performance is no guide to the future. But it is essential when considering the worst case to have some awareness of past stock market crashes.
In 2020, the FTSE All-Share index plunged 33 per cent from 4,257 on January 11 to 2,837 on March 14. It has since made up some of the losses and has mostly loitered in the 3,700s since the start of 2021. How much longer could we wait for a full recovery?
Looking at the three biggest crashes in the index over the past 40 years, Black Monday in 1987, the dotcom crash of 2000-03, the global financial crisis of 2007-09, investors had to wait for between two to five years for the index to return to its previous peaks.
For a gloomier story, look to Japan. After a 30-year wait, the Nikkei 225, the best-known benchmark of Japan’s stock market, burst through the psychologically significant 30,000 level this month. But it is still well shy of the index’s all-time high at nearly 39,000, back in December 1989.
Of course, there were still opportunities for canny active investors to make money in the Japanese market, for example with tech stocks that have soared in the past decade. The Japan story should not leave you running scared of stock markets if you have investments that are diversified globally and among different assets such as equities, bonds, property, and commodities.
Some investors may also hold “treasure assets” such as art, stamps and wine which can perform strongly. These could retain value outside the financial market, but they are only perhaps for the wealthiest as there may be high storage costs involved, as they can easily be damaged.
Investors with portfolios spread between the major asset classes would have been sheltered from some of these market crashes. For example, the MSCI PIMFA Private Investor Balanced Index aims to represent the strategy of an investor seeking a balanced approach between income and capital growth. It has 62 per cent in equities, 17.5 per cent in bonds, with 10 per cent in alternatives, 5 per cent in real estate and 5 per cent in cash.
Careful diversification is exactly what investment managers with conservative ‘growth with capital preservation’ remits do. So, if you are having sleepless nights watching Songbird or its cousins Contagion (2011) and World War Z (2013) that “predicted the pandemic”, it could be time to follow the experts.
Capital Gearing Trust. which I hold shares in, has an outstanding record of preserving investors’ cash. Peter Spiller took over as the investment trust’s manager in 1982 and recorded his first negative annual return of just 2.5 per cent in 2014. In 2009, Capital Gearing returned 12 per cent while the FTSE All-Share index dropped 30 per cent.
Today, with Spiller still at the helm, the London-listed trust’s largest fund holdings include a Vanguard fund which tracks the Japanese stock market, a FTSE 100 tracker fund, and German property fund Vonovia. The largest proportion of the fund, at 30 per cent, is invested in index-linked UK and global government bonds, which are tied to inflation. It has 47 per cent in funds and equities, 8 per cent in cash and 2 per cent in gold.
Ruffer Investment Company, which also aims for capital preservation with positive annual returns, has higher amounts in gold and cash — almost 8 per cent and 12 per cent respectively.
As investors, we are taught that hiding cash under the mattress is a woeful idea — it will be ravaged by inflation. Even in these low-inflation days, the rather addictive Bank of England online inflation calculator says that goods and services costing £10 in 2010 would cost £13.11 in 2020 because inflation averaged 2.7 per cent a year.
But there are good reasons to hold cash — as an opportunity fund, as a temporary store when we simply cannot find good investment choices or as a haven when we are feeling nervous. So there’s room for cash in our portfolio, with the caveat that holding too much will limit growth.
I don’t hold gold. But if I was going to add some as the ultimate store of value, I’d limit it to 5-10 per cent of my portfolio. The easiest way to hold gold in an investment portfolio is through an exchange-traded commodity (ETC) such as the iShares Physical Gold ETC. This aims to track the daily spot price of gold and physically invests in the metal in the same proportion as the value of the ETC. Ongoing charges are 0.16 per cent.
The Royal Mint sells portable gold bars, starting at £56.44 for 1 gramme. But be prepared to pay a mark-up — at the time of writing, the gold spot price was £40.95 per gramme. For the 1 ounce bar there is a choice: you can pay as much as £1,399.03 for the “James Bond” gold bar, compared with the market bullion price of £1,273.59 per ounce. The same-weight standard Royal Mint Britannia bar costs £1,306.59, so there’s an premium for the 007 version. Is having No Time to Die stamped on your assets really worth it?
But even in a pandemic, there are growth opportunities. Many investors are looking to technology and healthcare — Polar Capital Technology Trust and Worldwide Healthcare Trust are good ways to receive diversified exposure.
During a prolonged lockdown (perish the thought), we would still need food, drink and heat. So, consider investing in supermarkets and utility companies. Alternatively, you could get exposure through funds such as Allianz Global Agricultural Trends or the iShares Global Water UCITS ETF.
And if patience wears thin, we can hope for Covid to end and for our investments to come good and take inspiration from the funniest of pandemic movies, Shaun of the Dead. Faced with a zombie apocalypse, the decidedly unBondlike hero suggests having a cold pint of beer and waiting “for all this to blow over”.
Moira O’Neill is head of personal finance at Interactive Investor