“Events, dear boy, events.”
Apparently, Harold Macmillan may never have uttered the words famously attributed to him, when asked what he feared most.
If so, then Macmillan – the UK’s prime minister between 1957 and 1963 – missed an opportunity to be seen as more perceptive than history is otherwise likely to remember him.
For there’s little doubt that in the last few years, unforeseen events have again and again blown the global economy off course – and with it, the fortunes of individual investors.
Oil shock?
We saw that again over the weekend, with drone attacks on Saudi oil facilities. As I write these words, around 50% of Saudi Arabian oil output has been knocked out, equivalent to about 5% of global oil production.
Put another way, oil prices closed up 15% higher when markets opened the following Monday, with Brent crude – seen as a benchmark price index, like West Texas Intermediate – registering its biggest jump in 30 years.
Almost immediately commentators were drawing comparisons with the 1990 invasion of Kuwait, the 1973 Arab-Israeli war, and the 1956 Suez crisis – an event which, coincidentally, helped to bring Macmillan to power.
So is the world about to see another 1970s-style ‘oil shock’, when rocketing oil prices foretold recession and sky-high inflation?
Frankly, I feel that it’s unlikely.
This time it’s different
There are two reasons for being more sanguine, this time around.
First, the world is far less dependent on oil than it was. Vehicles are far more efficient, for one thing. And energy sources are far more diverse, for another. These days, for instance, a very large proportion of the UK’s electricity output comes from renewable resources – wind farms, solar farms, hydro-electricity, and biomass.
And second, in contrast to the 1970s, the world is far less dependent on the Gulf states for oil supplies. Here in the UK, we have the North Sea. It’s past its peak, but is still pumping. America has Alaska, and also huge reserves of shale oil.
A war with Iran would be another matter, of course. But for all of Donald Trump’s combativeness, that seems unlikely, too.
Not impossible, of course, but not likely.
Safety in numbers
The real lesson here, though, is a different one.
Imagine, if you will, that it’s 2009. In September 2009 the world was still recovering from another shock – the financial crisis and the ensuing recession. That said, it was recovering: I’d been hoovering up attractively-priced stocks for over six months, at that point.
Even so, back then who could have imagined that Donald Trump would be the president of the United States? Or that the chaos of Brexit could happen? Or that America would be locked in a trade war with China, taxing its own businesses and consumers with sky-high tariffs?
The attacks on Saudi Arabia aren’t – so far – quite on that scale. But they point to the same lesson: in an uncertain world, diversification is a very valid investment strategy.
Opportunity cost
So for income investors, the lesson is to seek your income from multiple sources, and multiple asset classes. For growth investors, it’s to seek your growth from multiple sources.
This isn’t always easy. And the price may well be a constraint on income, and a constraint on growth – especially for investors confident enough, or perceptive enough, to see attractive reasons to be overweight in a particular stock, sector, or asset class.
Nevertheless, it provides your wealth with a measure of resilience, through which – over the long term – shocks and setbacks can be weathered.
And in an uncertain world, that resilience is – almost literally – priceless.
