Aug/11 – SPECIAL HOT TOPIC: Current opinion on the economy
There is only one subject that I can write about at the moment and that is the volatility that we are experiencing in the world’s stock markets.
There seems to be a plethora of reasons why we are experiencing these massive swings:
It started with the political debate in the USA when the Democrats and Republicans argued about how to deal with the budget issues that threatened to prevent the Government from fulfilling its obligations. This debate was taken to the brink before a half hearted solution was reached.
The markets weren’t convinced.
The Eurozone then took centre stage and we learned of issues with regard to sovereign debt for Italy and Spain closely followed by the downgrading of the US credit rating by Standard & Poors.
The markets were still not convinced and the FTSE 100 dropped below 5000.
The European Central Bank then announced that it would start buying bonds from Italy and Spain and the Federal Reserve in the US announced that they would keep interest rates low till at least mid 2013.
Since then we have seen a few days of gains followed by negative days where the markets seem to be very sensitive to any bad news.
So how does all of this affect our clients who have pensions and investments invested using the Simple Solutions investment process.
The strongest point that I would like to make is that they have a diversified portfolio that has been designed based on their attitude to risk. This will include a portion, usually 15% invested in a commercial property fund and up to 40% in corporate bonds funds.
If you look at the performance of these funds compared with the FTSE 100 over the last 3 months then the FTSE has dropped by 12% but the property fund that our clients are invested in has only dropped by 4% and the corporate bond funds in our portfolios have only dropped by around 1.5% on average.
So the message is, don’t just assume that because the FTSE has plummeted that your investment has gone down by the same amount.
Our client’s funds have been invested for the medium to long term and one of the fundamental strategies for these investments is that they never act upon a kneejerk reaction. It may be tempting to sell everything and hide the money in a biscuit tin under the bed, but selling after such a dramatic fall in the markets simply means crystallising a loss.
Paper losses are not real losses until the investment is sold. Therefore it is best not to sell in a falling market unless you are forced to for a specific reason.
When you have a medium to long-term view, these are in fact the times to buy. Stocks are getting cheaper and company fundamentals are in robust shape.
So is this an opportunity? If you are a regular visitor to our website you will find some interesting quotes from Warren Buffett on our Resources page.
- "I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”
- “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
The first quote is quite powerful. The market is fearful just now and that is when he sees opportunities to buy.
The second quote endorses my advice at this time.
Unfortunately it is very difficult – if not impossible – to time a market top or bottom. The best strategy for those looking to invest new money is to ‘drip feed’ into the market.
If you have a lump sum to invest it can initially sit in a deposit fund and be phased into other funds over a period of months. This provides the benefit of £ cost averaging (google it for an explanation).
If you would like to discuss this further please contact us. If you would like us to review your existing portfolio please complete the form that is available from our home page on our website and we will respond to you as quickly as possible.
If you would like to arrange a meeting with one of our Advisers to discuss how we can help you please contact us.