Clem Sunter

No easy answers on where to put your money

2013-04-04 10:59

Clem Sunter

The one thing the whole Cyprus saga has done is to focus people’s attention on where they should store their wealth. According to the latest news, high net worth individuals could lose even more than 30% of their deposits in Cypriot banks and be given pretty worthless bank shares in exchange. That is a serious hit, but I guess it is better than the bank going under and as a depositor your losing everything.

A new precedent

The banking industry relies on trust and if that evaporates, all hell will break loose. Depositors en masse will try to get their money out in order to keep their assets in physical form (gold, property, diamonds, antiques etc.) or in paper form (cash under the mattress, directly held equities/bonds, unit trusts etc.)

Up until now, the retail banking industry has been bailed out as governments are well aware of this worst-case scenario. The financial crash in 2008 meant that many famous retail banks in the US, UK and Europe had to be propped up by government funds in one way or another. In the UK in particular, some of the banks were nationalised and the British government still has a majority equity share in them. New regulations and controls with names like Basel 3 have been enacted in order to boost the capital structure of banks. Moreover, in the UK the regulator will in future have the power to split banks up and separate their retail business from their investment and trading arms in the event of bad behaviour. Recent examples of rogue traders in banks losing anywhere from $2 billion to $6 billion in an undetected series of trades are now at the forefront of legislators’ minds.

Yet Cyprus, despite its tiny size in global terms, represents a turning point. Unlike Barings and Lehman Brothers which were principally investment banks that went bust (they did have deposits, but it was not their core business), we now have an example of a major retail bank almost certainly going to the wall.  Small depositors are being protected but the large ones are not. The die is now cast and the world is never going to be quite the same again. Any large depositor in a local bank in a small country or even in banks in large countries under financial stress like Italy and Spain must be wondering whether a repeat is possible and withdrawal of funds now is the most sensible strategy. Contagion is the thing policy-makers fear most.

The grass is not always greener on the other side

However, the other investment options for depositors wishing to change the way they handle their money are not necessarily less risky as 2008 has already shown. The majority of hedge funds and exotically named vehicles which were supposed to provide downside protection did not in fact do so in bad times. Their mathematical models proved wrong. Many ordinary unit trusts and umbrella funds have stiff management fees attached to them which have to be paid before you earn a return. Cash under the mattress or gold coins hidden in the garden run the risk of robbery. Property can be a high maintenance asset especially with tricky tenants. You have to know your antiques to buy them profitably.

So the dilemma about where to invest is real which calls for some innovative thinking. I know that ETFs (exchange-traded funds) have become increasingly popular for all the reasons I have cited plus you know exactly what you are invested in. They are transparent and cheap to administer. Yet stock markets are at or close to all-time highs just as Eurozone unemployment has hit a record 12%. Some of the indices represented by ETFs must at this point be vulnerable to correction, as must be the ETFs tracking commodities and bonds. I have also heard that people are investigating the purchase of digital currencies like bitcoins but they appear to fluctuate in value as much as gold.

Diversification is prudent

With all these variables and uncertainties, the only answer is, if possible, to have a diversified portfolio across a range of asset categories, markets and currencies. Bear in mind that income is just as important as capital gain. Like a fox, keep your eyes open all the time to the changes taking place in the environment in case you have to adapt your strategy and tactics fairly quickly in order to be ahead of the crowd. Don’t be greedy and get yourself a trustworthy financial adviser with a good track record. Above all, don’t be lulled into making big bets with an excessive amount of your assets. Now is not the time to gamble with your life savings.

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