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

published 13 December 2013

13-12-13-japan-stocks — 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.

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So you should be aware of the assumptions underlying your portfolio, and whether any of them are out of date.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

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, subscribe to MoneyWeek magazine.

Lifetime Wealth is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Past performance and forecasts are not a reliable indicator of future results. Please seek independent financial advice if necessary. Customer services: 0207 633 3600.

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.