SELL SELL SELL

The FTSE’s hit another record high, but Red Ed’s knocking on the door of Number 10. So . . . IS IT TIME TO ...

It took more than 16 years for the stock market to pass its previous all-time high, but having hit that mark of 6,930 on February 24, it has continued to set new records.

this week it touched 7,122 and yesterday closed at 7,030. Strip away the highprofile profit warnings of businesses such as tesco and confidence in the FtSE index of Britain’s 100 biggest firms is, largely, good.

But when the index hits a peak, it can seem a long way back down. this makes some investors jittery, wondering whether it is the time to take profits.

then we have a General Election next week, the outcome of which remains unclear. the last thing professional investors like is uncertainty and the possibility of major tax changes.

to further complicate matters, there are continued worries about the economic health of many European nations, plus the possibility of a change in U. S. economic policy.

So, should you ignore all this, hold your nerve and stick with being in the market for the long term? or should you cash in while prices are buoyant?

THE GREAT GENERAL ELECTION QUANDARY

WHILE there is plenty of analysis from investment firms about the immediate impact of the General Election, largely it’s meaningless.

there can be ups and downs depending on who wins and what economic policies they bring in, but these tend to be shortterm blips.

that’s not to say the outcome off elections are not important over the e course of a parliament. Research from investment firm Hargreaves Lansdown found that since 1970, the stockk market has performed twice as welll under tory rule as under Labour.

over the past 45 years, there have been five Conservative governments, five Labour governments and the current Coalition. Under the tories, the market has returned an average of 16 pc a year; under Labour, 9 pc. the Coalition has also averaged 9 pc.

However, while Labour has presided over two parliaments of negative returns — the 1974 Labour minority government of Harold Wilson, which was in power for nine months, saw a 47 pc fall in the stock market, and the 2001 government of tony Blair saw the FtSE hit a record low of 3,287 — it also has the record for the biggest growth by any parliament.

Following the second election of 1974, Harold Wilson was back in power when the markets increased by 368 pc over five years. this was largely driven by optimism following the end of a global recession in which inflation hit 19.14 pc and the price of oil quadrupled in a few months.

Laith khalaf, from Hargreaves Lansdown, says: ‘If you think about the things that have had a meaningful impact on share prices in recent memory, you think of the tech bubble bursting, the banking crisis or the Enron scandal — not the outcome of the 2005 election.’

CONFIDENCE — NOT POLITICS — IS KEY

So WHAt factors are most important if you’re making a decision about the stock market?

the key one that investors point to is the confidence of firms, and this is measured by something called the price to earnings ratio — or p/e ratio. this figure reflects a company’s share price compared to how much it earns investors per share.

For example, the p/ e ratio of pharmaceutical firm GlaxoSmithkline is 16. Essentially, this means its share price is 16 times more than what investors make for every share that they hold.

the ratio is useful to professional investors because it tells them how popular a share is compared to how much money it generates. the higher the ratio, the poorer the value the companies are.

Experts also look at the p/e ratio of the stock market as a whole to determine how much value is left in the market. Currently, the FtSE All Share is trading at a ratio of 17.5.

Its average over the past 50 years is 14, which means it’s neither particularly cheap or expensive at the moment.

(By comparison, before the stock market crash after the dot com bubble in December 1999, the ratio was a whopping 27.)

But another reason to put to the back of your mind anything going on in the Uk is the fact that around two-thirds of all profits for British companies come from overseas.

So what happens here plays only a small part in the overall health of companies based in the Uk. With that in mind, you need to consider what is happening overseas, too.

WILL U.S. INTEREST RATE HIKE HURT US?

The performance of the U.S. stock market has been called the bright spot in the global economy. The Federal Reserve was the quickest central bank to start pumping money into its economy, and so the U.S. has pulled ahead of others. The U.S. stock market, the S&P 500 index, has nearly doubled over the past five years to reach 2,119. At the same time, interest rates have been at rock bottom for six years. Now, though, the success of the U.S. stock market means it is the first economy to consider raising interest rates . It’s a huge risk that could send markets into turmoil. It sends out the message that the U. S. government is not going to prop up the market for ever.

The p/ e ratio of the U. S. stock market is 21 — again, not particularly high or low, especially when compared with its pre- dot com bubble level of 32.

It is not expected that a rate hike will happen until the end of the year at the earliest, and while experts are cautious about what effect it may have, many are still confident about the prospects for the U.S.

Russ Koesterich, chief investment strategist at BlackRock, says: ‘ In March 2000, the U.S. technology sector was trading at a p/e ratio of more than 72. The year leading up to the tech bubble bursting was marked by relentless multiple expansion of the stock market. It climbed more than 50 pc in one year.

‘Stock market milestones are just numbers, but they offer an opportunity to assess where we are. Today’s valuations look more sober.’

The situation is similar in Europe, where price to earnings ratios have moved largely in line with Britain. The European stock market is trading at 19, compared to an average over 50 years of 14. In December 1999, it reached 26.

Some savers might feel nervous about countries on the continent whose finances are in less than good shape, but it is important to consider the market in its entirety.

The FTSE Eurofirst 300 market, which is an index of European stock markets, is up almost 22 pc over the past year. The European Central Bank has promised to do whatever it takes to keep the eurozone together and get the economy back on track, and monetary stimulus has begun in a bid to get things moving.

SELLING ON A WHIM COULD COST YOU

THE investment guru Warren Buffett has a saying: ‘Don’t just do something, sit there.’

It means that, too often, nervous investors are tempted to tinker with their shares rather than sitting on their hands and doing nothing. It is a quality that is under-appreciated.

Buying and selling on a whim can cost you dear, particularly if you’re not a professional investor who monitors the market every second of every day.

If you invested £1,000 in the FTSE All Share 15 years ago, you would have achieved a return of 93.6 pc (or 4.5 pc a year) and have £ 1,936, according to figures from investment giant Fidelity.

But if you had tried to time the market and missed the best ten days, your savings pot would be worth only £1,047. If you missed the best 20 days, you’d have just £691.65.

Clearly, sitting on your hands can pay rewards. And that should be at the back of the mind of any investor.

Neil Lovatt, director at investment firm Scottish Friendly, says: ‘It’s vital that savers don’t get distracted by what they think might happen to the stock market in the next six weeks.

‘If you are saving for the long-term, for your retirement in ten, 20 or 40 years’ time, then it doesn’t matter what the next month holds.

‘It’s important to remember your goals and why you have picked the investments you have, and not get side-tracked by short-term noise.’

STAYING PUT CAN PAY DIVIDENDS

THE decision about whether you should stay in or take some profits from the market rests solely on your shoulders. Getting a fund manager or investment adviser to tell you when to sell shares is almost impossible.

If they knew, they’d be doing it themselves. And besides, their livelihood depends on people investing.

If you are a regular saver and had planned to put in your money for the long term, then you need to bear this in mind.

There will always be ups and downs, but the benefit is that you’re buying fewer shares when the market is high and more when the prices fall. That should help you make more profits over the long term.

On top of this, you need to remember dividends — the extra payouts that companies give to shareholders. Reinvested, they can have a big impact on your profits.

The return of the FTSE All-Share index over a 20-year period was 129 pc if you exclude dividends, according to figures from fund manager Invesco Perpetual. But with dividends received and re-invested, the total return over that time was 344.9 pc.

So even while share prices fall, the dividends you get from companies can continue to boost your returns.

For older savers there is another factor to consider — and that is about protecting the profits you have built up close to retirement age.

But, having done so well, is it time to take a little cream off the top of your profits? If you’re older, there is an argument for this. The downside of losing capital may be greater than the upside of what you’ll gain.

There may be no point in pulling everything out of the stock market, but investors should never be embarrassed about taking profits.