|
Reduced Risk Investments
Remember that we often use collective investment funds. If you had invested in one or two company shares and these went into administration then this would be a problem. However, in each collective fund there are often over 100 different companies shares held. This is another form of spreading the risk and allows you to sit out the current crisis. If one, two or even three companies go into administration you will still have 97 left. Not perfect but a lot less risk than investing in just one or two companies.
|
|
|
|
Dear Reader,
The current turmoil in the world markets is understandably worrying for many people. We have put together two simple strategies for dealing with the turmoil in an effective manner.
|
|
Strategies for market turmoil
No one would disagree that the equity markets around the world are having a difficult time. The credit crisis, price of commodities, inflation and several other factors are happening at the same time and this makes for difficult stock market conditions.
In these circumstances, emotion often takes hold of investors decision making and leads to decisions in the short term that appear to reduce the fear or disappointment factor. Often, however, these decisions are later regretted and are often expensive for the individual.
Here are two strategies that have severed our clients well in the past (having been in this job for 23 years and having seen several such stock market periods) and which could benefit you during this current period of uncertainty.
Current Investments Strategy
In 1973 markets fell by 25% and then in 1974 a further 50%. But in 1975 prices doubled in 3 months.
Black Monday - October 1987 - markets fell 22% in one day. But by the 31st December 1987 the markets had bounced so that the return for the year of 1987 was +4%, yes + 4%.
More recently, with the bursting of the tech bubble and 9/11, markets fell 50%. But share prices climbed again in 2003 by 30%. From 2004 to 2007 they climbed a further 50%.
The lesson from this is that there are often significant rebounds after severe corrections. This is because markets often become oversold and at the end of a correction there is a period known as "capitulation". Often this is caused by people eventually throwing in the towel and selling their investments. In the current market, capitulation is likely to be when the companies that have overstretched themselves will go bust. XL, the travel operator is the most recent example but Northern Rock, Bear Stearns and now Lehman are three of the other well known examples. We await the fate of other banks, AIG and many other airlines and travel companies. After the "flushing out" of these companies perhaps we will start to see the turnaround.
The issue is that nobody knows for certain when this rebound will occur and how much of a rebound we will get. We will be only be able to know this after the event. But research from Fidelity group, which has been repeated for several years now, is instructive and shows that if we had invested £10,000 in the FTSE in June 1992 and left it until June 2007 (the date of the last survey) our £10,000 would have grown to £46,120. BUT if we had missed the 10 best trading days (because we had taken our money out of the market) we would only have 30,410. A whopping difference of £15,710 less. And if we missed the best 15 days the difference would be a staggering £24,000 less.
In terms of risk, one of the biggest risks is therefore to be out of the market. The best strategy for your investments is actually to keep them in the market EVEN during times like these.
The value of investments will go down as well as up and investments should be considered as medium term investments, not short term.
|
|
|
Making Money Strategy
If you want to improve the performance of your investments there is another great strategy which has helped many investors, including the likes of Sir John Templeton. Sir John was a contrarian investment. He started his career by buying 100 shares in 104 companies. 34 of these companies were in bankruptcy. He lost money on 4 of the companies but the others started him on career that made him a billionaire. He had 5 steps to financial success.
Take calculated risks
Save Don't Spend
Shop for value investments
Take advantage of international free markets
Minimise your taxes
Personally, I agree wholeheartly with these steps and I am sure you will be able to see that in these current markets it is possible to use these steps. Of course, we want to know how to take a calculated risk. Here is some very important information that will help you calculate the risk.
The Barclays Capital Equity Gilt Study has been undertaken annually for many years. It still shows that equity (shares) investments outperform cash (money in the bank) in the following ways:
Over any 3 year period shares outperform 71% of the time. Over any 10 year period shares outperform 93% of the time.
Furthermore, over the long term shares have exceeded inflation by 6.7% per annum ie inflation + 6.7%.
So what strategy to adopt? Currently, the stock markets are way below these figures from the Barclays study. This is true of both the 3 year figures and for the inflation plus 6.7% this year. For someone who wanted to take a calculated risk, invest for the medium term and follow Sir John's steps to financial success the best strategy could be investing now!
|
We will continue to keep you informed about events. For daily financial news and charts click on News and Charts
If you wish to discuss your investments or wish to profit from the current turmoil, contact us
|
|
Sincerely,
Barry Davys MBA Dip PFS
PS. There is now a postscript to this posting which emphasises the importance of the points raised in this newsletter. World stockmarkets have fallen in the last 6 weeks and in some cases now stand 65% below their highs. YET in a single day we have seen markets bounce 13.8% (Japan), 7.8% (USA) and 6.9% (UK). Whilst markets have not yet settled down it could be that being in the market on days with such big bounces will prove to be important. Time will tell!!!
|
|
|
