Investment Planning ? Back to Basics


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Spring is in the air. After the flow of discouraging economic and market news through the winter, the outlook now appears to be sunnier. There is increasing optimism

Spring is in the air. After the flow of discouraging economic and market news through the winter, the outlook now appears to be sunnier.


There is increasing optimism that the global economic downturn may be bottoming out and that we could see a return to growth sooner than expected. Investor, business and consumer sentiment has risen.


The growing confidence among investors resulted in global stockmarkets posting very positive results in April, and as at the time of writing (27th May) the FTSE 100 and Dow Jones Industrial Index are both slightly up on the start of May, despite some dips along the way. At the end of April respected fund manager, Anthony Bolton, declared that ?all things are in place for the bear market to have ended?. He anticipates the rally to last several years and is also bullish on high yield bonds.


On 11th May, the Financial Times reported that total returns in the European and US high yield bond markets had risen almost 20% since the start of the year, making the sector the best performing assets. As Jim Reid, strategist at Deutsche Bank, told the FT, this ?is a good sign as the outperformance tells us that investors are no longer expecting the global economy to collapse into depression?.


Many investors who have been sitting in cash, too nervous to invest amidst the volatility and uncertainty, are now beginning to wonder if it is time to step back into the market.


The key questions I am being asked are: Is it now safe to invest in equities? Has the market has reached the bottom? Will the economy continue to drag markets down? How can we be sure that this is the start of a bull market and not just a bear market rally? Where should I invest?


Unfortunately, without a crystal ball, I don?t have the answers to these questions. Only hindsight will tell us when the market bottomed. It is possible that markets won?t fall back under their March lows, but it is also possible that if the economic news turns worse it may derail the market recovery for a while. Either way, even if markets have passed the bottom, the upward path probably won?t be smooth sailing and we will continue to see ups and downs for a while.


This is a good time to go over some investment basics.


Time not timing


Most investors who switch in and out of the markets on good and bad news are worse off a result. As I?ve previously said, it?s time in the markets, not trying to time the markets, that achieves the best results. In most cases it is impossible, even for the experts, to predict when markets will suddenly rise or fall. Looking at this year, the best time to have invested in equities was at the beginning of March, but would you have predicted amongst all the negative news at the time that markets would improve as they did over the rest of March and April?


Missing just a few of the best days in an economic cycle can significantly reduce your returns. Provided you are invested for the longer-term, it does not necessarily matter if the markets have hit the bottom yet or not. If you are leaving your money invested, a short-term paper loss is not the end of the world. Bull markets always follow bear markets and any remaining downside is likely to be small compared to the returns which could be generated once the ensuing bull market starts.


Establish your objectives


Your investment strategy should first and foremost be structured around your personal circumstances and objectives, and not reports of market gains. If you will need access your capital in the short-term, then you should advisably leave it in cash – there are too many short term risks with either equities or bonds.


On the other hand, if you are retired and need to protect your capital and income from inflation you should be a long-term investor with your portfolio designed around your life expectancy rather than current events. You need to invest in real assets (equities, bonds, property) because sitting in cash will not provide the protection you need.


If you require your capital to provide income then a bond fund is often a better option than equities because they allow you to receive regular income without eating into the capital -and therefore without you having to sell at a time when values have fallen. At the moment high yield bond funds are paying a very attractive income ? many well into the double figures – and this is a rare opportunity to lock in such a high yield (even while capital values are still poor).


Diversify and then diversify some more


Regardless of whether equities sound attractive to you right now, or high yield bonds, or even cash, it is always recommended that you spread your capital out over a few different asset classes. It is impossible to know one year to the next which will be the best or worst performing asset, so having a spread will allow you to benefit from the best assets while reducing your exposure to the worst.


A portfolio should normally be first of all diversified across asset classes and then some of the assets classes diversified across sectors, countries, companies etc. You could go a further step and diversify some of your funds across managers with multi manager funds.


Poor economic news does not have to prevent markets rising


We are likely to see more bad economic news, and in any case it will take a while to return to economic growth. While this may impact on market performance it will not necessarily prevent a bull run ? historically markets recover before the economy does. Bull markets usually start when things look bleak and often keep going even though they get bleaker for several months.


Bull runs always follow bear markets


Being exposed to equities now ensures you will capture the upswing – and the upswing can be quite powerful. According to Global Financial Data, based on the S&P index, the last five bull markets lasted an average 68 months and produced an average return of 188%.


Pound cost averaging


If you think that this would be a good time to invest but still feel too nervous to do so, you could ?drip feed? your capital into the markets (whether equities or bonds or both). So, let?s say you have ?200,000 in cash, you could invest it slowly over a year, for example, by investing ?50,000 now and the remaining ?150,000 at intervals. While you would miss out on some gains if the market does keep rising, you won?t have missed out on all of them and if asset prices fall again you would have reduced your potential loss.


You could make a start now by setting up a structure like an investment bond and using it to move money around slowly until you are fully invested. These bonds can provide attractive tax mitigation opportunities, and these would start straight away.


Advice from an experienced financial professional like Blevins Franks will be invaluable in establish the most appropriate investment strategy for you.


Bill Blevins, Managing Director, Blevins Franks

27th May 2009

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.