US President-elect Donald Trump. Photo / File
Normally if you have had a bad dream and you wake up in the morning you open your eyes and you think "thank goodness that was only a nightmare".
For many people the opposite happened last week - they woke up and their nightmare began and the name of the beast was Donald Trump.
It's worth reflecting on how we got into this predicament.
Winston Churchill provides an insight - one of his famous quotes are words to the effect that "the best argument against democracy is a 5 minute conversation with the average voter." If anything things have got worse since then as, thanks to the media, the population has gradually been "dumbed down".
Reality shows and sports have replaced the news, fashion stories dominate the business sections and sensationalism frequently supplants journalistic endeavour. Unfortunately however the media delivers what the public wants and it seems that it is simply easier not to think.
Even though NZ is thousands of miles from Washington the prospect of a radically different, many would say worse, US government is having a big impact on the financial markets. In today's story we will look at the impact thus far of Trumponomics on investment portfolios and discuss an appropriate strategy for the future.
Probably the most widely anticipated change from the Donald is that he will attempt to "make America great again" through fiscal stimulus ie spending more money on infrastructure.
The popular narrative is that this will cause inflation and thus interest rates to rise.
There is also a suggestion he might try to exert pressure on the Federal Reserve to make less use of quantitative easing. Therefore the obvious solution is "sell bonds, buy shares".
That may be right but it may also be wrong and the important thing to note is that it is likely to be more or less factored into prices very quickly.
Since Mr Trump was elected 10 year US government bonds have risen by 36 basis points (from 1.85 per cent to 2.21 per cent) and NZ 10 year government bonds are up by 29 basis points (from 2.81 per cent to 3.10 per cent).
These are big moves but in NZ's case it just takes interest rates back to where they were eight months ago (March 2016). We also need to keep in mind the fact that when interest rates rise the worst impact is on longer term bonds and best practice is to own a range of bond maturities - not just longer dated bonds.
It's also worth noting that these numbers refer to government bonds and often when interest rates rise because of a perception that economic conditions are improving then corporate bond yields rise by a lesser amount. This is because improving economies also imply better credit worthiness of companies.
Even though NZ is thousands of miles from Washington the prospect of a radically different, many would say worse, US government is having a big impact on the financial markets.
As at 15 November the NZ government bond index is down by about 1 per cent since the US election so that's not the end of the world nor is it a definitive sign that interest rates will continue to rise. Rising interest rates are not a good reason to forsake a diversified portfolio and sell bonds to buy shares.
A number of commentators are saying that this could be a turning point for the bond market and that interest rates are going to go up blah blah blah. Apart from the fact that many of these experts have been singing from the wrong song book for much of the decade even if they are right this time, and they could be wrong again, it doesn't make owning bonds a bad move.
Even in the worst case scenario where an individual bought a 10 year bond at the low point he or she will, if they hold till maturity will get their money back and a return of around 2.12 per cent - not a disaster. There will be a lot of attractive looking investments bobbing around today that will do a lot worse than +2 per cent pa compound over the next 10 years. But let's go back to basics - the average pension fund owns shares and bonds, pre-Trump and post-Trump. Why?
The other important thing to remember is that whilst fund managers' marketing brochures tell us that they "manage" portfolios on our behalf they are critically aware of "career" risk so never ever "bet the house.
It's all about risk - shares protect against inflation risk and bonds protect against deflation as well as stabilising portfolios in times of volatility and providing a regular income stream. Whilst rising interest rates are bad for long dated bond values they are better news for short dated bonds because when short dated bonds rollover the funds will attract the new higher interest rate. Frequently when bonds do badly shares will do well.
The nature of a diversified portfolio is that at any point in time some things do well and some things do badly and as the future is not ours to see we own diversified portfolios.
So far many commentators have focused on the negative impact of Trumponomics on bonds but other investment sectors have done a lot worse since the surprise election of the Don. For example NZ shares and emerging markets are down 1.8 per cent and 6.3 per cent respectively since the election as Trump is apparently anti-trade and high US interest rates imply a stronger US dollar. Both of these variables are bad news for emerging markets.
So what is the key takeaway here? Firstly as the Financial Times argued the other day "simple narratives, whilst easy to understand, are often wrong."
Interest rates might be heading up from now on but they might not and higher interest rates may well impact other areas more than they do bonds.
For example investors are apparently buying US shares because they see Trump as being pro-growth but as US interest rates rise the US dollar will likely follow which will be bad news for US companies which generate a lot of their profits from overseas.
We need to remember that nothing is certain in the investment world and only a few retired investors can afford the luxury of big mistakes. Getting it wrong can be painful, both in terms of one's wealth and one's ego. Investors who must, by their nature, speculate should note that doing the opposite of the consensus ie what you read in the popular press usually pays off than following the crowd.
The other important thing to remember is that whilst fund managers' marketing brochures tell us that they "manage" portfolios on our behalf they are critically aware of "career" risk so never ever "bet the house".
If their base position is 40 per cent in bonds and they are negative on bonds they might, if they are feeling particularly courageous, go to a 38 per cent weighting simply because the only thing that is certain if you are a fund manager is that if you get it wrong you are down the road. In fact there is an old saying that it is better to be conventionally wrong than unconventionally right.
Supermarkets like FreshChoice Epsom now stay open until 9pm for online orders.