HOW TO WEATHER STOCK MAR­KET STORMS

HOLD YOUR NERVE AND SEEK OUT THE AD­VICE OF SEA­SONED EX­PERTS, AD­VISES MYRA BUT­TER­WORTH

The Daily Telegraph - Your Money - - Front Page -

DE­SPITE the storms that have en­gulfed stock mar­kets in re­cent weeks, in­vestors can still find funds to ride out the tur­moil, ac­cord­ing to our panel of ex­perts.

This Thurs­day, the FTSE 100 in­dex of Bri­tain’s largest com­pa­nies dropped be­low the psy­cho­log­i­cal 6,000 level for the first time since March this year, be­fore clos­ing at 5858 points.

The de­cline was trig­gered by prob­lems in the US hous­ing mar­ket, where bor­row­ers with flawed credit his­to­ries have taken out home loans known as “subprime” mort­gages.

As US in­ter­est rates have risen, th­ese bor­row­ers were un­able to keep up with their in­creased monthly mort­gage re­pay­ments. The re­sult­ing bad debts have cre­ated a global prob­lem be­cause of the way the li­a­bil­i­ties had been spread across fi­nan­cial in­sti­tu­tions around the world.

When con­sumers have less money to spend, this is bad news for com­pa­nies try­ing to sell them prod­ucts.

Justin Mo­dray, of in­de­pen­dent fi­nan­cial ad­vis­ers (IFAs) Bestin­vest Bro­kers, said: “It is es­pe­cially hard to sec­ond guess the fu­ture at present, but one thing is for sure, it will be far harder to make money over the next four years com­pared to the last four years.”

While ex­perts agree that the out­look for stock mar­kets looks frag­ile and could re­main volatile for months ahead, in­vestors are warned not to be pan­icked into pulling their money out of the stock mar­ket.

The pit­falls of try­ing to pick and choose when to in­vest are high­lighted by re­search by as­set man­ager Fi­delity. Its mar­ket tim­ing re­port re­veals the im­pact of miss­ing out on even a few of the best trad­ing days.

For ex­am­ple, if you had in­vested £1,000 in the UK stock mar­ket in Au­gust 1992, then it would have been worth more than £4,700 15 years later at the end of Au­gust 2007.

How­ever, if you stripped out the best 40 days dur­ing that time, the ini­tial £1,000 in­vest­ment would be worth less than £1,400 to­day.

Stock mar­ket in­vestors should be pre­pared to stake their money for at least five years be­cause, as Philippa Gee, in­vest­ments di­rec­tor at IFAs Torquil Clark, warned, eq­ui­ties are not a quick fix so­lu­tion. Ms Gee said: “They do not pro­vide a way to make a fast buck for the av­er­age in­vestor and money may be lost in the short term, but let’s not for­get that eq­ui­ties are the best in­vest­ment over the long term.”

Look­ing back over the last cen­tury, shares beat bonds and cash de­posits in three quar­ters of the pe­ri­ods of five con­sec­u­tive years or more, ac­cord­ing to the Eq­uity Gilt Study con­ducted by Bar­clays Cap­i­tal, a sub­sidiary of the high street bank. Over longer pe­ri­ods of 10 con­sec­u­tive years or more, shares came out on top 80pc of the time.

Jus­tine Fearns, head of in­vest­ments re­search at AWD Chase de Vere, said: “It is un­der­stand­able that in­vestors are feel­ing ner­vous due to the re­cent volatil­ity of the stock mar­ket but it is es­sen­tial for them to keep calm and not to make any knee-jerk re­ac­tions like sell­ing de­cent in­vest­ments.

“In­vestors need to sit tight and hang on be­cause things are go­ing to be rocky over the next few months. How­ever, on a more pos­i­tive note, the long-term ride should get a lit­tle smoother.”

In­vestors can help limit the im­pact of stock mar­ket falls by us­ing pooled funds such as unit and in­vest­ment trusts, which can spread risk by in­vest­ing in a col­lec­tion of dif­fer­ent com­pa­nies and as­sets.

You should also con­sider in­vest­ing through reg­u­lar sav­ings plan, rather than in a lump sum.

By sav­ing each month, you buy more units in a fund as the mar­ket falls, and then ben­e­fit when the mar­ket picks up and they rise in price, in a con­cept known as “pound cost av­er­ag­ing”.

Rather than plac­ing all your eggs in a stock mar­ket bas­ket, the ad­vis­ers rec­om­mended spread­ing your money across a wide range of as­sets in an at­tempt to con­trol fluc­tu­a­tions in the over­all port­fo­lio.

Ms Fearns said: “Non­cor­re­lated as­sets should be­have in­de­pen­dently of each other, which means that just be­cause the stock mar­ket is fall­ing, prop­erty and fixed in­ter­est in­vest­ments should not fol­low suit.”

In­vestors should seek in­de­pen­dent fi­nan­cial ad­vice, to ben­e­fit from rec­om­men­da­tions tai­lored to their in­di­vid­ual cir­cum­stances.

Dar­ius McDer­mott, man­ag­ing di­rec­tor of Chelsea Fi­nan­cial Ser­vices, said: “In­vestors of­ten ask what to do when mar­kets start go­ing down fol­low­ing a pe­riod of sus­tained stock mar­ket growth. The an­swer is never easy. It very much de­pends on your cir­cum­stances, how long be­fore you need ac­cess to the cap­i­tal and your at­ti­tude to risk. The main fac­tor to take into ac­count is you have not lost money un­til you sell it, along with the fact eq­uity in­vest­ment should be for at least five years.”

For those look­ing for the best place for their money in the cur­rent un­cer­tain cli­mate, our panel of ex­perts rec­om­mended sev­eral “de­fen­sive” funds that in­vest in com­pa­nies that should do well in all mar­ket con­di­tions, in­clud­ing multi-as­set of­fer­ings and funds run by ex­pe­ri­enced fund man­agers.

Ben Years­ley, of Har­g­reaves

Lans­down, said: “No one ac­tu­ally knows how things are go­ing to pan out, but in­vestors should trust the fund man­agers who have ‘been there and done it’ to buy the com­pa­nies with good long-term prospects.

“If you are a new fund man­ager who has only been in the busi­ness for three or four years you have only known a ris­ing mar­ket, so volatil­ity and big falls in the mar­ket are a new phe­nom­e­non for you.”

In par­tic­u­lar, Mr Years­ley sug­gested Neil Wood­ford, who has run the In­vesco Per­pet­ual In­come fund for al­most 17 years and the High In­come fund for 19 years.

As our ta­ble of funds rec­om­mended by the ex­perts shows, if you had in­vested £1,000 in In­vesco Per­pet­ual High In­come five years ago, you would be sit­ting on a healthy re­turn of £2,127 to­day.

Mr Wood­ford said: “While the re­cent volatil­ity in UK eq­ui­ties has been quite ex­treme, it should per­haps be seen as a timely re­minder that eq­ui­ties can be a volatile as­set class in the short term.

“But the moves should also high­light to in­vestors the im­por­tance of look­ing be­yond short-term swings in sen­ti­ment and fo­cus­ing on long-term fun­da­men­tals. I have al­ways adopted a longterm in­vest­ment approach and, in this sense, this re­cent cor­rec­tion has had a min­i­mal im­pact on my strat­egy. It has, how­ever, pro­vided the op­por­tu­nity to add to some hold­ings that have sold off un­de­servedly.”

An­thony Bolton, man­ag­ing di­rec­tor of Fi­delity af­ter 28 years head­ing up the Fi­delity Spe­cial Sit­u­a­tions fund, de­scribed the cur­rent mar­ket volatil­ity as “per­fectly nat­u­ral”. He said: “When mar­kets fall, un­der­stand­ably in­vestors may lose con­fi­dence and ei­ther stop in­vest­ing or re­deem their hold­ings. But if in­vestors hold firm and per­se­vere, his­tory shows that they will be re­warded if they are will­ing to take a long term view.”

In­vestors who fun­da­men­tally be­lieve in stock mar­kets but can’t sleep through mar­ket tur­bu­lence should con­sider pro­tected funds and guar­an­teed eq­uity bonds.

Mr Mo­dray said: “While th­ese may com­pro­mise re­turns com­pared to con­ven­tional funds, your cash should at least be safe and you will reap some ben­e­fit should mar­kets rise.”

Mean­while, in­vestors who are re­ally wor­ried about los­ing their shirt on the stock mar­ket, or need ac­cess to their money within five years, should stick to the safety of cash. USE­FUL CON­TACTS To find a lo­cal in­de­pen­dent fi­nan­cial ad­viser, call IFA Pro­mo­tion on 0800 085 3250 or visit www.un­bi­ased.co.uk . Track your port­fo­lio and check latest fund prices at: www.tele­graph.co.uk/money

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