Free money Asks for Risk Management
Pfäffikon SZ, Switzerland – The interest rate decision on part of the ECB president – Mario Draghi – is symbolic of nature. The difference between applying 0.15% or 0.05% amounts to splitting hairs. Historically, however, the decision goes without precedent, for as of yesterday money is officially free. Investors in Europe are causing the divergence in European and American markets to narrow somewhat. Curious, since the measures undertaken by Draghi were not born out of abundance.
Macho’s
These days central bankers are the machos of the financial world. They provide doping to investors. The free money politics has caused various financial market instruments to yield zero returns. In certain cases one is even expected to supply money. Investors are like people: in search of returns. To achieve these returns more risky asset classes are all too often sought out which promise higher future returns. Some investors even opt for an aggressive approach and reject their natural inclination towards caution and restraint. This gives issuers the opportunity to place even riskier issuances as it becomes increasingly tricky to invest safely.
No IPO
This process has been going on for a while. It goes without saying that yours truly has not participated in any IPO in the last several years. The same goes for the biggest in American history – Alibaba– which I will be passing on next week. Some investors have been pointing out the low volatility and beautifully upward turning trends. Volatility is merely an academic approach to the measurement of a risk. In some cases a useful instrument to perform certain calculations. When the volatility increases investors suddenly become fearful of losing their investments. But this has no bearing on making proper investments, something that is frequently forgotten.
Reluctant
In any case; free money asks for risk management. Warren Buffett describes it as follows: “Be fearful when others are greedy and greedy when others are fearful.” My feeling tells me that as an investor one should be practicing restraint. No one will be able to tell you when a serious correction will hit the global markets. Stocks, in many cases are still not expensive. Moreover the signs from namely the American economy are hopeful. The bull market could persevere for years to come, do not fool yourselves.
However, when central bankers encourage investors to take increasingly more risks, it will eventually end in tears. The era of carefree market conditions is over. A time has arrived where risks have increased without a commensurate risk premium. It is for this reason that risk management should be an investor’s top priority.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.
