If you’re going to take a big bet for 2014, make it this one

Japan: still in ‘mad central banker’ mode

As I write this, my inbox is stuffed with comments on what’s going to happen in 2014. It’s mostly rubbish.

People who sell shares are telling me that shares will go up next year. People who sell bonds are telling me that while they are historically expensive, there are selective opportunities out there. Estate agents are telling me there’s no bubble in the housing market.

These forecasts are just sales messages. You can ignore them.

But there’s one set of forecasts that you shouldn’t ignore – your own. Every asset you own is in your portfolio for a reason, even if it’s just inertia. Like it or not, you are taking a view on what might happen next, and how that might affect your retirement plans.

So you should be aware of the assumptions underlying your portfolio, and whether any of them are out of date.

And there’s no better time to do that sort of review than at this time of year…

What are the assumptions underlying your portfolio?

We all have views. We can’t help ourselves. They might be muddle-headed, made-up of conflicting or incomplete information, and subject to a wide range of personal psychological quirks and biases.

But we’re only human.

So I don’t believe it’s possible to construct an ‘opinion-free’ portfolio. Even the most sensible and disciplined asset allocator makes those allocations for a reason, even if it all boils down to a faith in historic correlations.

So for all that you can ignore the various pundits giving curiously specific targets for the FTSE 100 in 2014, you should make sure you review the assumptions underpinning your own investments. And now’s a good time to do it. Most of us have at least some time off over Christmas, and the markets are usually quiet or shut. So you have a bit of breathing space to take stock.

If you’ve never done this before, don’t worry – it can be a bit time-consuming, but it’s not complicated. Just gather together your investments: be they in individual savings accounts, pensions (old company ones or your own private ones), or a plain old stockbroker account.

Add up your individual holdings, and look at how much exposure you have to each. Also look at how this breaks down by sector and asset type. You might be shocked to learn – particularly after the rather bullish year we’ve had – that you now have a much larger proportion of your investment money in a single stock or market than you realise, or consider wise.


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So look at where your portfolio is now. Then think about where it should be – your ‘ideal’ asset allocation. If you are miles away from that ideal, then you should think about rebalancing: selling what you have too much of, and buying more of what you think you should have more exposure to.

The right allocation for you will depend on the length of time you have to retirement, and your own attitude to risk and investment experience. If you’d like to learn more about asset allocation and managing your own money, you should try my colleague Phil Oakley’s Lifetime Wealth newsletter.

Phil’s strategy runs according to some very simple principles – keep it cheap, and diversify your risks. He’s building a portfolio that should be suitable for most investors with a reasonable length of time to go before they retire.

As for my own portfolio – I’ll take some time to review it over Christmas. But I already know what I’m most interested in for 2014: increasing my exposure to Japan.

Why I’ll be betting on Japan in 2014

My colleague Ed ran through the case for Japan earlier this week. But to me there’s a very straightforward rationale for getting exposure to Japan, if you haven’t already.

From next year – in fact, potentially from next week – the Federal Reserve is going to be gradually making its monetary policy less explosive.

Don’t get me wrong. The Fed will be at great pains to emphasise that less quantitative easing (QE) doesn’t mean higher interest rates. It might even go as far as trying to set a higher inflation target to hammer the point home. But the overall feeling is going to be of a central bank looking for an exit route.

Japan, on the other hand, is still in full-blown mad central banker mode. Even now, there are plenty of sceptics – disappointed in the past – who are waiting for either prime minister Shinzo Abe or the Japanese central bank head to show some signs of timidity. They both need to keep up the pressure to keep the markets convinced. No one in Japan is talking about a ‘taper’ yet.

What does that mean? It means one of the forces driving the US dollar lower – QE – will be receding. At the same time, the forces pushing the yen lower will still be in place. So we can expect more yen weakness, and more strength in the Japanese stock market.

We’ll have more on this and the best trades for 2014 in the next issue of MoneyWeek magazine, out next Friday. If you’re not already a subscriber, get your first three issues free here.


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5 Responses

  1. 13/12/2013, Avon Barksdale wrote

    You may be right on Japan but you are completely wrong on the Fed.

    You’re looking at the Fed but you’re not LISTENING to what they’re saying and this is one of the reasons people shouldn’t take investment advice from journalists.

    Any – and I mean ANY – hint of tapering and the yield on the 10 year note heads north. That really is all she wrote and all we need to know. A reduction in QE means an increase in interest rates whether the Fed likes it or not. All the rhetoric from the usual suspects on the FOMC is just that – rhetoric. When yields hit 3, 3.5 or 4%, what do YOU think the Fed’ll do? Taper more, hold or buy more bonds? Can you see the US housing market recovery continuing with mortgage rates at 4%?

    Hmm. Didn’t think so.

    • 14/12/2013, gamesinvestor wrote

      In what way is he wrong about the FED – he didn’t say interest rates wouldn’t rise he said the FED will be trying to convince people that interest rates won’t rise – not the same thing. Look at the statement again :-

      “Don’t get me wrong. The Fed will be at great pains to emphasise that less quantitative easing (QE) doesn’t mean higher interest rates. It might even go as far as trying to set a higher inflation target to hammer the point home. But the overall feeling is going to be of a central bank looking for an exit route.”

      Whether QE is curtailed or not it’s too early to say, no one knows. If it’s done slowly it may have minimal impact on interest rates. On the other hand a complete reversal and rates will rise rapidly – this is unlikely.

      On Japan – again no one knows – personally I think it’s a crackpot idea and I’d liken investment in Japan like picking up pennies in front of a steamroller – at some point your going to get crushed.

  2. 13/12/2013, olivio wrote

    Avon Barksdale is right.

    The FED cannot taper. They won’t, they are handling it very well, keeping the markets cool by hinting it. It was priced in in September and didn’t happen. I am betting big that QE increases not tapers. No way can they let the bond yields go up, they won’t be able to service their debt. If it means sacrificing the dollar so be it.

    No way, no how does the Fed taper in 2014.

    • 14/12/2013, Inquisitor wrote

      They’re cornered no matter what they do. Interest rates are not going to be subject to the control of central banks long term. The following two articles are great insofar as they explain the limitations the Fed faces and the fact that any outcome that comes about will be costly in its effect on the real economy.

      http://mises.org/preview/6609/How-the-Paper-Money-Experiment-Will-End

      http://mises.org/daily/5110/

      The only thing to note is China has a bigger bubble brewing than anywhere else, and Japan is instigating one. On this basis, the US and Europe may suffer, but they won’t be the epicentre of the next meltdowns.

  3. 21/12/2013, The One Eyed Man wrote

    Do you ever see the resemblance between internet commenters and the loud oaf proclaiming his supposed wisdom at the end of the bar? No tapering indeed!

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