Too Good To Be True

Some things blow up when you least expect them to. Remember when you first heard about the Ryan Giggs rumours? Surely it can’t be true? Often its easier to go on believing than accepting the facts.

I’m sure you remember the commercial property crash of late 2007. If you were a client back then you remember we recommended you sold your property fund and held the proceeds in cash. What happened next is history; funds shut up shop, unhappy clients could not get hold of their money and their savings fell by almost 50% on average.

The property crash followed a bubble. We are told that an investment bubble cannot be seen. The bubble wouldn’t grow to such huge proportions without the belief in it continuing to grow further. It can’t be a bubble. But when a bubble finally pops, like the technology share bubble in 2000, the commercial property bubble in 2007 and of course the banking bubble of 2008, it does so with devastating power. Losses of 50 to 70% are often incurred.

Are there any clues to guessing when a bubble is going to blow?

A good pointer is well above average growth with a graph starting to go vertical. After all, something has to get very big before it pops. We believe we are beginning to see this with UK Government Gilt investments. Gilt edge securities, as they are also known, sound like you can’t get hurt. However with UK Government Gilts yielding only 2% currently, it has caused their capital values to rocket.

We have been investing in index-linked gilts since 2008. We were expecting annual returns of around 5.5% per annum. Since 2008 we have enjoyed compound returns of 6.00% then 8.51% and then 19.99% (see what I’m saying about going vertical?). If you would like to see this in graphical form click here.

Many of our clients who wanted to take advantage and invest in the FTSE 100 index when it fell back to around 5000 points in August of last year, have already sold their index-linked gilt fund to create the capital necessary to invest. We believe its now time for even our more cautious investors to sell.

Breaking up is always hard after such a long and profitable relationship but profits aren’t profits unless you take them. We have no recommendation as to where we put the proceeds at the moment and so suggest we just sit it out in cash within our plans. We are sure we will get the opportunity to buy something cheap in the near future as there is still lots of bad news out there.

Could we be wrong?

Of course. We think it’s a bubble now but sometimes they continue to grow for some time. However the bigger the bubble becomes the bigger the eventual pop.

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Risk Warnings

Past performance is not necessarily a guide to the future
The value of index linked funds can fall as well as rise.