‘Move to 50% cash’: Veteran investor Brian Dennehy repeats his warning

Brian Dennehy is managing director of research platform FundExpert, and when Russia invaded Ukraine last year, he advised investors to switch to 50 percent cash.

His red alert and 10-step plan for investors concerned about portfolio declines caused a stir as it goes against common investment advice not to sell out when markets fall.

The markets had a torrid year in 2022, but have since recovered some ground – and the FTSE 100 was one of the few major equity markets to perform positively.

What does Brian say now and how does he view his call afterwards?

More than a year later, Brian stands by his belief that investors should be 50 percent cash as the endgame of a 40-year bull market plays out.

He explains why investors need to rethink their thinking as market shocks continue to come, and where to leave the 50 percent that is still invested.

Russia invaded Ukraine on February 24, 2022, and on that day I recommended investors switch to 50 percent cash.

Why? How did that turn out? And what lies ahead?

We were already exposed to pandemic risk and the markets had not collapsed out of sight.

Then came the war and escalated risks to inflation, energy prices and supplies, food supplies and renewed pressure on a range of other supply chains.

This set of vulnerabilities was superimposed on a US-focused 40-year bull market, which by nature had limited elasticity to handle new crises, yet had created a dangerous complacency about investment risk.

It wasn’t just necessary to take money off the table and safely place 50 percent of your investment portfolio in cash. It was also necessary for investors to adjust their thinking.

For example, you had to accept the major vulnerability at the end of this very long investment cycle.

You also needed processes to identify weak positions (the overnight test where you imagine all of your investments were suddenly sold without your knowledge and you have to decide which ones to buy back) and to mitigate losses ( a stop-loss strategy).

War in Ukraine: Prime Minister Rishi Sunak met with President Volodymyr Zelenskyy at Checkers this month

Since the day the war started, the FTSE World index in pounds sterling is up 2%, the S&P 500 is down 4%, the FTSE All-Share is up 1%, the FTSE Small Cap is down 14%, and indexed gilts are down 35 percent.

It is a colorful selection of outcomes, but in retrospect it turns out that 50 percent cash was not a bad strategy.

Better yet, you’ll now receive nearly 4 percent in a cash fund.

> View the best savings rates in the tables of This is Money

Classic End-of-Cycle Early Warnings: What To Look Out For

The war shed a bright light on an inflationary risk that was already bubbling up.

History suggests that when interest rates flip and rise, the result isn’t a whimper but a bang. Breaking things – markets, economies, companies.

Before the pandemic, things started to break, with some classic end-of-cycle early warnings that we’ve highlighted on a regular basis.

From 2018-2020 these were just some of the collapses: Woodford, GAM, Greensill, Credit Suisse, H20 and Wirecard.

These were caused by some form of overconfidence and complacency, massive debt and illiquidity, or other serious problems.

But there was only one common thread. These are the symptoms of the end of a long cycle of falling interest rates and, in the decade from 2009, of a reckless experimentation by central banks.

The Bank of England has raised its benchmark Bank Rate – commonly known as base rate – all the way from 0.1% at the end of 2021 to 4.5% in May 2023

Fast forward to 2022. Oddly enough, it was the collapse of some low-risk assets that caused the real shock in 2022.

At one point, British index-linked gilts, one of the world’s most sensible investments, fell more than 50 percent.

The weaknesses in the world’s financial plumbing were exposed – and it was and remains a world problem. The British anomaly was only the first revelation.

The extreme fall in cryptocurrency assets in 2022, and some examples of fraudulent activity, are barely mentioned because they were so predictable (and indeed predicted by me and many others).

Earlier this year, I said, “In 2023, you should expect similar collapses, spawned from a mix of fraud, mismarketed financial models based on fictitious math, and zombie companies built on sandhills of debt.”

Our expectations were not disappointed.

On March 8, 2023, a classic bank run was revealed. A bank run is when depositors from a bank or building society panic to withdraw their money, as happened with Northern Rock in September 2007.

Now it was the turn of Silicon Valley Bank, not a name widely known in the UK, although it was the bank of multi-billionaire California tech moguls. It went wrong!

Why? Because they had to sell their assets in US Treasuries to meet withdrawals. That is another ultra-safe asset class, but it suffered significant losses in 2022. It is those losses that hit SVB when these ‘safe’ bonds had to be sold.

After similar withdrawals from depositors through March 10, 2023, it was Signature Bank’s turn to stay afloat. This was the second largest banker in the cryptocurrency industry. Others have followed.

> Why gradually – and then suddenly – some US banks have gone bankrupt

So what’s next? And if you are 50% invested, where do you put that money?

Some commentators believe that the events described above are one-off and peculiar. But once you get a series of seemingly unrelated events, doesn’t it happen that a pattern emerges?

Of course these are not peculiar. Those who are still relaxed are missing the bigger point. These are the death throes of a 40-year cycle of falling interest rates and falling inflation.

There is still a long way to go for the necessary easing of complacency, bubble valuations of US stocks and skyrocketing debt (and the occasional fraud and corruption).

It is not known how long that could take, but probably years.

Where will the next ‘shock’ come from? In 2022 it was safe index-linked gilts and in 2023 safe banks because of losses on safe US Treasuries.

Shadow banks? Commercial real estate? The shock need not be financial – it could be an escalation of war, cyber-attacks, a pandemic or the climate. The list is only limited by your imagination.

Nobody knows. Just remember that there is fundamental underlying vulnerability and you need to be ready to act.

In the meantime, keeping 50 percent in cash, earning 4 percent, isn’t the dumbest thing to do.

What about those who like to take more risk?

For those who are close to the market and confident in their ability to apply a stop-loss, or are simply content with higher risks, a large cash buffer may not be suitable.

But I think most retail investors should consider a substantial cash weight in their portfolio, if they don’t already have one.

Where should you invest your 50%?

So where should the 50 percent that is invested go? Here are a few suggestions.

Asia in general: Central banks in Asia have not repeated the gross mistakes of those in the West and inflation is somewhat lower. This, and the more attractive valuations, encourage me to buy a value-style Asian fund.

Japan: Low valuations and probability of a bouncing currency are attractive. If you haven’t already, follow Warren Buffett’s example and buy a value fund or smaller companies.

China: A stock market emerging from a 15-year bear market and with a post-lockdown government now focused on restoring growth. Buy a fund with an emphasis on the Chinese consumer.

Raw materials: Whether driven by China’s resurgence, greening the planet or rebuilding Victorian infrastructure, increasing demand combined with a lack of supply will boost commodity supplies.

AI: The larger technology stocks have done well recently, the smaller AI companies less so. Now that the long-term potential is becoming clearer, you can buy a specialized AI fund for part of your portfolio.

> Read Brian Dennehy’s original 2022 column: ‘Move to 50% cash’: Red alert time for investors

> Read the alternative view: How to invest and stay calm in a stock market shock