HOW TO WEATHER STOCK MARKET STORMS
HOLD YOUR NERVE AND SEEK OUT THE ADVICE OF SEASONED EXPERTS, ADVISES MYRA BUTTERWORTH
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