The secret to getting your money to bounce like hot potatoes between different investmentsby Merryn Somerset Webb / January 23, 2014 / Leave a comment
Everyone who invested in the stock market made money last year. It was almost impossible not to. US equities rose. UK equities rose. European equities rose. Even Japanese equities—which pretty much everyone in the market had long given up on—rose. If you held a bog standard portfolio of developed market equities you would have had to do something deeply dumb to end up making less than 20 per cent on the year. That was nice.
Will the same happen this year? It’s almost impossible to find anyone who thinks it won’t. Ask an analyst and he or she will tell you one of two things. The first is that markets will rise because economies are improving: the crisis is over. The second is that ongoing quantitative easing (the process whereby central banks print money and pump it into the economy) and super low interest rates will keep pushing markets upwards indefinitely.
The first is nonsense. There is absolutely no correlation and never has been between economic growth and stock market returns. Markets are moved by money flows in the short term and valuations in the longer term. Whether the financial crisis is over or not is entirely by the by (although for the record it is worth saying that it is far from over).
The second point is clearly more valid given that it focuses on money flows. The key here is understanding quantitative easing and how it works to boost the price of all assets. When the Bank of England, the Federal Reserve or the Bank of Japan indulge in what governments like to call “unconventional monetary policy” and the rest of us like to call “printing money,” they use new money to buy bonds in the market. The person who sold them the bonds now has the money. They use it to buy something else, perhaps some shares in Spain. The former holder of the Spanish shares then uses the cash derived from this sale to buy something else, perhaps a little bolt hole just off the King’s Road. Just in case. The money jumps like a hot potato (this is an analogy I have borrowed from Peter Warburton of Economic Perspectives, the economic consultancy) from one asset class to the next pushing up demand and hence prices on every stop.
Anyone in any doubt about this need only look at a chart showing the expansion of the…