Markets 2016: May the force be with you


Are you looking for drama, action and suspense?
Don’t rush to the movies.
Markets will give you everything these days!

Lights, camera, action!
Mrs Janet Yellen Chair of the Board of Governors of the US Federal Reserve System (FED) raised interest rates late last year and signaled that the long cycle of easing is over. Markets became increasingly cautious as inertia has long been disrupted in late August events. China has been in the radar of market participants for further action, but things derailed from developments in an unforeseen and underestimated market: oil. A decisive drop in oil prices during January initiated investor panic as market participants see coming what they hate most: deflation.
FED policy is under question, again!
As uncertainty explodes, the future looks worrying. One month after this historic rate increase markets remain fragile and the recent decision from the central bank of Japan to deploy negative interest rates brings the fear of deflation increasingly real.

The force awakens
Is deflation the real enemy? Are we back to zero after so many years of money printing and central bank stimulus?
Don’t expect a well presented opinion; we don’t know. Read all the experts and you will end up in the same conclusion (or read the ones that agree with you, and it will feel better 
What we can say with confidence is that this month was a good example of why people lose money in the markets. And the bad news is that private investors are likely to suffer more than other market participants (see why here).

But it is my money, stupid!
And now to investments. How can someone invest in this environment? Buy bonds because deflation is coming? Buy stocks because central banks will step back in hiking rates? Stay in cash because everything may derail and another global crisis is on the cards?
Or … even better … do nothing (that sounds better, i agree)
We are afraid it is time for some action. Increased fear and volatility leads to investment paralysis. A bull market for the last seven years will certainly make some investors close some positions but those souls that invested late in the bull market are not feeling happy right now.

What to do is simple: Be brave and reduce risk
As volatility explodes you risk more by keeping the same capital invested as before. By trimming your positions you ensure that increased risk is reduced given the more volatile environment we are in. In an ideal setting one would seek his portfolio risk to be aligned both vertically (within portfolio) as well as horizontally (through time).