OVER THE course of my career, I have come across many potential investors who are “thinking” about investing their money. They have money available to invest, they realise the benefits, but they “just want to wait and see” how the markets are doing.
As soon as the markets go through temporary volatility, as they did this spring, these people think they were justified in holding back. But you cannot watch and wait forever, and they would have missed out on the market gains that followed.
It is a good idea to do your homework and not make rash decisions. But at some point you have to make a decision and make the investment. If you wait too long, you will probably miss the opportunity you were attracted to in the first place.
At present, share prices are rising. The FTSE 100 index has recently hit three-year highs a number of times. The index began 2005 at 4814. On February 10 it hit the 5000 mark. It then swung up and down through the spring, falling to just under 4800 at the end of April. Its recent high (as at the time of writing) is 5261. That’s a gain of around 9.5 per cent in just over two months. For those still thinking about investing this is a huge loss due to indecision in the main.
Other markets are doing well too. In the US, the S&P index has flirted with its highest level in four years. European equities have been on a bull run despite a backdrop of sluggish economic growth and political uncertainty. The FTSE Eurofirst 300 index recently hit a three-year high of 1,151, up 10.5 per cent from the start of the year. This compares with an 8.9 per cent rise over the whole of 2004.
Without a crystal ball it is impossible to know exactly what will happen next. Nobody would have predicted the dreadful bombs in London on July 7. The FTSE reacted initially by falling sharply. Someone I spoke to at the time used it as an example to justify why he would not invest in equities. But by focussing on the short term, he had lost sight of the bigger picture. Over the year, the markets have improved satisfactorily and, like many before it, the fall turned out to be very short lived. The markets were understandably shaken by events that morning, but by the afternoon the mood was already more stoic. One strategist explained: “People are very resilient and we are seeing that here. Markets have a way of moving on. The fundamentals are still there and this time next week I think the market will have moved higher” – it took much less than that.
US markets eked out gains on the day itself while stocks in London only needed one following session to recover losses. While we cannot forecast market tumbles, we can set up our portfolios strategically so that temporary volatility does not matter. Except in very particular circumstances, I never recommend equities as a short-term investment. They should ideally be kept for five years or more. Over time, equities outperform every other form of investment. It is “time” and not “timing” that makes the best of returns from equity markets.
The main reason why people stall on investing is anxiety over what the next major move in the markets will be. They are concerned that they may lose some of their hard-earned capital, but, on the other hand, they could be worrying themselves out of profits. You can reduce this obstacle:
•Recognise that taking a short term nominal loss (you don’t lose any money unless you cash in) is not the end of the world.
•Establish your objectives, needs and circumstances and then select the appropriate mix of assets for your portfolio.
•Don’t listen to every bit of investment advice and rumours you hear on the street. Many ‘lay’ people recommend certain stocks or give you their interpretation of the market situation – but usually they don’t have hard facts and get it wrong. Only take advice from financial professionals.
Take less risk by:
•Including blue chip companies in your portfolio.
• Diversifying your investments – buy shares in a number of different classes, styles and across market sectors and geographic areas.
• Holding more than one type of investment. You could, for example, set up your portfolio to include equities, corporate bonds and a with-profits or guaranteed investment.
•Recognise that not investing is also a risk, as this exposes your capital to inflation.
•Unless you are an experienced investor, consult a professional financial adviser rather than buy and sell shares yourself.
No one can accurately predict what the markets will do in the future, but the hard fact is that, in spite of possible market volatility, the most guaranteed way of not making money is never to invest. You will not make money by monitoring investments, or by doing more and more homework. But if you want a good chance of watching your capital grow, you need to make an investment that will achieve these aims. Speak to your adviser and analyse what type of investments is suitable for you. Do a little research if it makes you feel more secure, but don’t leave it too long. Time, tide and the markets wait for no man!
• To keep in touch with the latest developments in the offshore world, check out the weekly news update on our website, www.blevinsfranks.com
