Should I go with investor advice to ‘sell everything’?
Q I recently read of investors being told to ‘sell everything’ as we are heading for another global meltdown. I have €20,000 in a managed fund. Should I be worried? A There are reasons to be nervous. The benchmark Dow Jones shares index endured its worst start to a new year since records began in 1897 – down more than 5%. Then came a pretty bleak global investment forecast this week from Royal Bank of Scotland, which urged investors to ‘sell (mostly) everything’.
It forecast that international markets could slump by 20% this year and oil prices halve to $16 a barrel. RBS compared current conditions to those that preceded the 2008 financial crash, pointing out that the world has too much debt to be able to grow.
Its report said: ‘The world is slowing, trade is slowing, credit is slowing, we are in a currency war, global disinflation is turning to global deflation as China finally realises what it needs to do (devalue soon and sharp) and the US then, against all this countervailing pressure stokes the fire by hiking rates.’
The dire prediction came after another major bank – Morgan Stanley – forecast that oil could hit $20 a barrel, partly on the back of global economic woes. The price is currently over $30 but was consistently above $100 as recently as 2014. The fall is good news for drivers but bad for energy companies and major oil producers like Russia and the Middle East.
Davy stockbrokers is more positive than RBS but points out that we are entering the seventh year of a growth cycle.
‘Overall we remain constructive on the outlook for 2016 as conditions today are consistent with mid, rather than late, cycle conditions.
‘However, we are conscious that the recovery is now in its seventh year, and as we know, economic cycles do not last forever. As the cycle matures, the risk of another downturn grows.’
Goodbody stockbrokers predicts a positive outcome to 2016 with around 8-9% profits growth, which is in line with most investment banks. However, it warns economic momentum in emerging economies is poor with growth forecasts still being reduced.
So RBS stands out as being particularly pessimistic at this point with most experts merely urging caution, while predicting further growth.
At least you are in a managed fund, which spreads the risk and takes away some – but not all – of the stress. A professional fund manager will buy and sell shares on your behalf and may have scope to ‘dive for cover’ by selling shares and buying safer assets such as Government bonds instead, although this would only happen in extreme circumstances.
Check out the details of the fund you are in and you will understand the risks better.
The bottom line is that nobody knows for sure where share prices will end up going in 2016.
Your options, in increasing order of risk, are to:
Transfer your money to a deposit account at around 1% interest (safe but a poor return)
Switch to a safer fund such as one that invests a higher percentage of its assets in Government bonds Stay put The choice is yours. But remember that the most common way for amateur investors to lose out is by switching funds, which racks up extra charges and means they miss out in the all-important but shortlived window for major growth – when the market bounces back.
If you’re fretting about the stock markets too much maybe the uncertainty of share investing isn’t for you. The standard advice for amateur investors is to simply forget what the market is doing for five to ten years as the inevitable volatility sorts itself out. Q I need to extend my home for a growing family. Is tax relief still available for this? A The Home Renovation Incentive (HRI) scheme has been extended up to the end of 2016. Effectively, you can reclaim the VAT (13.5%) of repair, renovation or improvement costs. This is repaid in the form of an income tax credit over two years.
You can spend as much as you like but the credit applies only to sums of between €4,405 and €30k spent (before VAT) for each home, including rental properties.