It’s been quite a year for investing in shares. We have not had large gains or significant falls in value, but as you can see from this graph of the FTSE 100, it has been a volatile 12 months with increases in value, followed within weeks by decreases. Clients who remain invested for the longer term can be less concerned about this as successful investing is more about time in the markets, as opposed to timing the markets. However it has been a tricky time for people either making new investments into the markets, or accessing their investments; getting on the investment ladder or stepping off in other words!
So what’s the answer if you are accessing capital? Well I would say the most important question you need to ask yourself is, “when will I need the money back?” The closer you get to that date, the more sensible it is to take risk off the table or ‘bank your gains’, especially if the consensus is that the markets are expensive. There are various options open to you BUT care needs to be exercised. Some people:
Switch to Cash – Sounds easy but it’s not, as human nature is such that if you are doing well, you may be inclined to leave things as they are. However usually you will be more upset in losing an amount of money at this stage, rather than pleased to make the equivalent amount – so don’t be greedy.
Switch to Fixed Interest (FI) assets.. “the 5 year returns have been great” – Government Gilts and/or Corporate Bonds have done unusually well and over the long term they tend to be less risky than shares. However we are in strange times and many commentators are nervous about FI. With interest rates rising, holding them may not be the safe haven people think. Unusual upside can also mean an unusual downside!
Switch to Gold – Often viewed as a classic safe haven, but stay in it too long and it can be a sobering experience – i.e. a fall in the $ price of 32% between October 2012 and December 2013 being one such example (Gold Prices.Com).
If you are just starting to make investments for your future or you are still some years from when you will need access to the capital, there are ways to make volatile market conditions work in your favour.
Invest every month, not as a lump sum – This works well as you will sometimes invest when markets are low, sometimes when they are high. If the consensus is that markets are high, holding some of your capital back to invest later not only appeals to any need for caution, but also provides the potential of greater opportunity going forward. As Warren Buffett once said, “we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”.
Select a mixture of assets – For the majority of people this might be the way to go. Multi Asset investing means you needn’t worry so much about short term extremes of gains and losses from individual assets. A portfolio of assets providing a blend appropriate to someone’s objectives, timescale of investment, assets and liabilities, attitude to investment risk and capacity for loss, is often a good idea. This solution can be run by an experienced manager who will make all the key day to day decisions so you can concentrate on getting a good night’s sleep.
Author: Phil James, Grosvenor Consultancy Ltd
There are advantages and disadvantages to using all of these strategies and they depend on individual circumstances so don’t take action without seeking competent advice. Tax rules, rates and allowances are all subject to change. The Financial Conduct Authority does not regulate tax advice and some forms of offshore investments. The value of investments and the income from them can fall as well as rise and you may not get back the full amount you invested.
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