Investing in a bubble

That could happen. It has only been a few months since President Trump’s edicts on trade tariffs plunged investors into a panic, with markets falling 10%, 20% or even more. Markets have since convinced themselves that the US will blink first when it comes to imposing the toughest tariffs – this is the “Trump always chickens out” or Taco trade – but if nothing else, the year so far has been a stark reminder that equities can be highly volatile.

However, calling the top or bottom of a stock market is a fool’s errand. Move your money into defensive assets today and you could easily rue returns foregone for months or years to come. Market bull runs often endure far longer than sceptics expect, even if their anxieties are entirely rational. And it’s rarely the event or crisis you expect that eventually does put a stop to the party.

In which case, it’s important to ask the most fundamental question as you think about how to position yourself for what’s to come – why are you currently saving and investing?

Maybe your money is earmarked for a particular objective that now looms large on the horizon – to fund children through university, say, or to finance a property purchase. If so, you can’t afford to risk jeopardising that objective and you should take precautions accordingly.

Alternatively, maybe your pot of gold is set aside for a time long into the hazy future – retirement days in a couple of decades’ time perhaps. Over those time horizons, even the most shocking short-term ups and downs start to look less relevant.

The other sensible thing you can do right now is think seriously about how you’re investing. In particular, the case for actively managed investment funds looks particularly strong during periods of heightened volatility and uncertainty. Passive funds may be hugely popular, but they blindly track markets in either direction. In an active fund, by contrast, you have access to a professional fund manager making real-time decisions about individual stocks in the portfolio. He or she gets paid to spend all day thinking about the anxieties that may now be worrying you.

Moreover, the current market conditions are ideally suited to investment trusts. Leave aside the usual argument about the merits of the investment trust structure – liquidity, stability, income flexibility and so on – valuable though they are. The other interesting thing about investment trusts is that managers very often have more freedom to make unconstrained decisions.

Investment trust portfolios are much more likely to look very different to the benchmarks that describe the average performance of the markets in which they invest. Managers often make contrarian decisions, eschewing fashionable stocks they think are running out of steam, perhaps, or hunting for value elsewhere. They won’t always get it right, but there is the potential for them to steer a safe course though bubble territory – as many did during the dotcom boom and bust, for example.

It almost goes without saying that there are no guarantees – and some investment trust managers are more independently minded than others. Still, in today’s market environment, strong leadership can help uncertain investors sleep easier at night. Very often that’s what you’ll get from an investment trust.