Author: Richard Hartley, 01 December 2007.
Norwich-based independent financial adviser Alan Boswell & Company asked market commentator Stephen Phillips to look at UK equities and asked should investors expect to see another "correction" – market-speak for a fall. Phillips' view is that whilst this seems possible - especially with a credit crisis which has quickly spread from the US around the world - it is by no means inevitable.
When it comes to investments, the past is certainly no guide to the future. But anyone looking at the FTSE100 since the mid 1980s will see that there has been a long term rise in market values. The large fall in the value of equities during the first third of this decade was actually a re-adjustment for investment markets that had become overheated in the run up to the millennium.
Indeed, Stephen Phillips believes history may come to adjudge the last five years of the twentieth century in the same light as it does the corresponding period of the nineteenth – as one when normal rules apparently ceased to apply to investment markets.
Whatever the case, current market values appear to be more in line with long term trends than the earlier peak. Nevertheless, it could be argued that the FTSE100 is now at the top of its range of possible values, so a further correction is possible.
Little Cause for Pessimism
According to Phillips, the principal factor is whether markets believe that companies have sound underlying financial structures that will allow them to continue producing dividends and capital growth. This, he says, is not an opinion formed in isolation, but in the context of economic conditions. Currently, the principal influences are interest rates, the risk of inflation, China’s growing economic power and, of course, the extent to which the sub-prime
mortgage problems in the US will impact on world markets.
Phillips doesn't take an overly pessimistic view of equity markets at the moment, although he agrees that there will probably be a degree of volatility for some time to come. Only if major investors start to lose confidence does he expect there to be a large fall in market values.
For us as investors, it is important to consider our
investment portfolios in the light of what might happen and how much "downside risk" we are prepared to accept.
Balanced Portfolio of Assets
All equity – and, indeed, property –
investments should be seen in a long-term context. Shares are notoriously open to fluctuating values and property can take time to sell; but they both have historically offered potential for growth.
What is important in any
investment portfolio is to avoid too much exposure to individual sectors. If, for example, you have half your assets in pharmaceuticals, and a miracle cure suddenly renders previous medicines, redundant, then your holdings will fall in value. This is, of course an extreme picture, but it highlights the dangers of relying too heavily on one asset class.
In reality, individual market sectors move up and down at different times for different reasons. For example, the shares of one UK bank (not Northern Rock!) have fallen more than 20% compared with the FTSE, during the last few months. Conversely, a tobacco manufacturer has outperformed the index by more than 10% over a similar period.
Diverse Investment Strategy
A proven method of reducing risk is to adopt a
diverse investment strategy – this means looking at different types of shares in separate geographical areas and sectors, as well as other assets such as property and commodities. You may well will miss out on the full growth when one class does spectacularly well, but it also means that you will not suffer the full downside either.
It is important always to seek independent financial advice before making any decision regarding your finances. If you would like any assistance, please contact us.Alan Boswell & Company is one of the UK's leading independent financial advisers and offers a range of
investment services and advice. For more information, please ask to speak to one of our advisers or use the
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