I am sure you are aware that stock markets globally fell considerably towards the end of last week. This is as much by a consensus of fear rather than due to any rational thought. The Euro crisis brought about by opinion that Italy, Spain and others may default has swiftly followed on the heels of the political incompetence in the US as leaders dithered over their own domestic problems.
I do not believe that is another 2008 market crash (which rebounded within a year) as this time the major world banks have largely sorted out their debt, strengthened their balance sheets and have already taken into account the risks of the current markets. The toxic debt issues of 2008 are different to the sovereign debt issues we are facing today. In 2008 no one knew the level of debt, now we do. On top of this some of the major companies like BP and Rio Tinto who have seen spectacular falls are also announcing resounding profits. Most of the Fortune 100 companies have strong balance sheets.
My view remains the same that we are seeing a blip in the market that was not wholly unexpected, and there will continue to be high levels of fluctuation, but with banks offering zero to very low interest and Gilts at almost their highest levels ever, equities remain a good investment opportunity in the medium to long term. We will certainly see volatility for some time yet, but there is no need to panic.
As ever, herd mentality can take over and many people have rushed to sell, mostly unnecessarily, pushing prices down further. Better to be smart, look at the fundamentals and only then take action if required.
As ever, the best option is a diversified portfolio. Your investments funds should be selected based on a number of issues: your personal views on risk, market sentiments, time frames and accessibility. Portfolios should be reviewed on a regular basis to ensure that you are investment in the best performing fund in a sector.
- Yields in bonds and gilts are looking poor and are not sectors to be recommended in most cases.
- Commodities traditionally perform poorly in difficult markets so action may need to be taken if there is too much exposure to this sector.
- Gold is traditionally seen as a safe haven in troubled times, but investment in one narrow sector is always high risk. Broadbased mining funds may be a better bet.
- Equity Income funds should feature in most portfolio and as they receive high dividends they tend to show less volatility than pure equity funds. They tend to focus on companies with strong cashflow and defensive business models.
- There are products that base their return on the performance of a stock market index over a set amount of time with capital guarantees, so this could be a good opportunity to consider such plans. I have schemes available with excellent counterparty guarantees.
If you have specific concerns regarding your investments, or wish to discuss taking advantage of the current market falls, please do not hesitate to contact me.