If There is a Crash Coming, Should I Care?

At the moment there is a lot of chatter in the news about financial markets with a lot of headlines along the lines of 'Is there a crash coming?' or 'Are we all going to die in some great financial fireball?'.

And to be honest, I find these articles a bit tedious, because as soon as the news starts to be dominated by these articles, people start sending me links to them with comments along the lines of 'this is really important'. And when I start to be a bit dismissive, they start to get upset, because the information in these links 'IS REALLY IMPORTANT!!!'

But for two quite different reasons, I don't think that the information included is very important.

The first is because it is rarely very clear what to do with the information. And indeed I suspect that most of the reflexive responses, such as pivoting to gold, will in the long run prove to be ball calls, made more in panic than based upon any real insight about any given situation.

But the second reason is the one that I think is more interesting - and to explain that reason, I will first explain why I chose the picture that accompanies this article. 

The picture itself is one I took whilst on a walk from the Thames Barrier, heading generally along the Thames to Kings Cross - although you can see from the photo that I at times ventured away from the Thames somewhat.

This was on a day when I was coming back from visiting friends, and rather than simply rush through London as fast as possible to get home, I figured I would take my time and make the most of the fact that I was already down in this part of the world.

The picture itself was taken on the way up to the Greenwich Observatory, and I think it captures the biggest decision that we all face in our investing lives.

In the distance we have the City of London, with lots of shouty noise and lots of drama, but nearby we have the tranquil scenery of Greenwich Park.

And as an investor you have a choice - you can spend your life living in that shouty world trying to maximise every last bit of return, or you can choose to instead structure your investment life to allow yourself to spend as much time as possible in that lovely leafy greener (albeit, perhaps with slightly lower returns).

But at the end of the day, I left my 9-5 corporate job because I wanted to be away from shouty people - where minor issues were often made to feel like something that could bring about Ragnarok and the end of days - complete with dragons, catastrophe and war.

And having left all that behind, I sought to replace it it with the opportunity to spend much of my time looking at scenes like this (Derwent Water, in the Lake District) :

And I'm pretty proud of the fact that this is pretty much what I have been able to do with my time since leaving the corporate world behind - but is it really that easy to sidestep all that noise, and how far can you really go with such an ideal?

Dealing with the Noise

In reality, it is never easy. Noise that surrounds you in every aspect of your life - be it some drama in your street, or be it fears over the impending collapse of life as we know it.

A solution is to blank out any noise at source  - which is in part why I get annoyed if I start getting too many helpful articles sent my way - but I do find the most simple way to deal with it is to have and stick to a plan I have confidence in.

For me on the investing side, my plan is simple - I have a passive side to my portfolio, which contains indexes that have a high enough dividend yield, coupled with active investments targeting 10% cash returns (after core items). 

And on the active side, my focus is simple - to find companies that I like and that I'm pretty happy to hold onto for some time - and then to put some money into them, and go on whatever journey that company decides to go on.

The passive approach gives me a lot of peace of mind, and I have never once had a worry about the passive side of things - mostly because there really is nothing to really worry about on that side.

My use of the dividend yield to assess the 'safety' of an index fund is probably unusual, but in my mind this adds a layer of risk management. The logic is that if the dividend yield of an index is 3% then the stocks included are probably producing enough spare cash to have a bit of margin of safety should it be required.

By contrast, if stocks in an index were on average yielding 1% then it is harder to have the same level of confidence. Yes, they might be amazing growth companies, but equally they might not be - and if I am approach it with a passive mindset where I cannot use any insight, I need to set very simple boundaries and conditions for any investment.

With this in mind if the yield is 1.5% I avoid, if it is 2% that is enough to continue to hold, whilst at 3% I'm a buyer. If I cannot find any good indexes then maybe I'll have to be less picky, but I have bought them now, so that is not a near-term problem.

On the active side I do perform deep analysis - and here there is far more vulnerability to bad decision making, as my analysis opens up a possibility of error. Here I try to target 10% returns to increase the margin of safety, but if you are going to be doing active investments, you are going to introduce an increased risk of failure.

But throughout it all, I have a clear plan and on all of these investments what I end up with is a buy point, a sell point and a second sell point if in a tax free wrapper. When analysing an individual company I do have to take the market conditions into account, but beyond that there is a lot I don't need to worry about.

And to make life even easier, once I have set these buy and sell points and get into the operational phase I merely have a set of limits to respond to. When new financial reports come out I redo the analysis, but it isn't very common for those buy or sell limits to change.

And so whether there are risks in the secondary debt market or in real estate in the US is not of any concern - my analysis has been performed and I merely need to follow my limits (which already allow for margins of safety).

So Is It Working?

Well in terms of whether it is working, there are definitely still both positives and negatives.

I do think I am successfully avoiding the broader market noise - and I think the tedium I feel whenever someone tries to talk about a market crash, or about some daft robot some company is going to make trillions from, backs up the fact that I am being successful here.

For the passive portfolio this means that I'm super chilled about everything and here I just sit back and relax and let time do its things, whilst enjoying having the money come in whenever it is time for a dividend distribution.

I might still keep an eye on the general news, but by this point it is more for the sake of entertainment rather than to impact any of my investment decisions.

And on the passive side of my portfolio, I am confidently able to state that I am spending the entirely of my time in that park, looking down the hill at the City of London far across the river.

When I cross over to the more active side, it does definitely get more complicated, however.

I do enjoy the active side of investing - and enjoy taking the time to learn about companies and to understand where their true value lies in comparison to the market pricing. And this is something I always want to be doing on those quiet days where there is little else to do with my time.

But so far it's not been possible to entirely throw off those doubts and concerns that maybe I'm not quite as good as I'd like to be at doing the analysis, and setting those buy and sell limits.

To date there have been no scenarios where I find myself unduly concerned, but I certainly would feel a bit of additional comfort if with the passage of time I had accumulated enough additional history to look back on and say 'yes, this is working'.

Now, I have been here before in prior aspects of my life - where I've committed to head down a path to reach the point where there are visible green shoots, but only small shoots of progress. On those prior occasions sticking to the plan worked out, and once shoots became bushes and bushes became trees, I could relax somewhat and be more confident in my decision making.

But here and now on the active side, I have maybe not quite got to the point where I can wander freely through that park enjoying the sunshine, but I do think that in time I will get there.

My long-term ideal is that I grow that confidence, continuing to dip into the analysis on those days when I could use something productive to do, before switching off and acting in operational mode otherwise. 

Overall though, I am pleased to find I'm still enjoying things - and no, I don't think I should care if there is a crash coming. I have bought at good values, and I'm confident that my money has found a good enough place to be.