Stockmarkets have surged over the last 8 months ? investors with previously invested equity portfolios have seen a significant recovery, while those who bought shares/equity funds this year have m
Stockmarkets have surged over the last 8 months ? investors with previously invested equity portfolios have seen a significant recovery, while those who bought shares/equity funds this year have made some very healthy profits. What matters now, though, is what will happen next.
There are many ?expert? opinions. Some warn that the market has risen too high too soon and will fall again. On the other hand equities have not yet recovered to their pre-credit crisis level and there are still plenty of stimuli for share prices to rise. However we cannot rule out a correction, especially since many investors often opt to take their profits after a good run, especially if something happens to make markets jittery.
As an investor it is not easy to know what to do at this point. If you take some of your capital, or just your profits, and move them into a bank account you will earn negligible interest on them – probably negative real returns after inflation. If markets continue to head higher you would miss out on further capital growth.
On the other hand, if you leave everything invested, including any profits you have made, and markets do fall, you could undo much of the good work done this year.
Since it is impossible to predict what markets will do in the future with any accuracy, the solution may be to use a middle ground between bank savings accounts and direct equity investment and move your profits into that.
Guaranteed funds can provide investors with the security of deposit accounts at the same time as potential for returns linked to world equity markets.
They allow you to invest indirectly in the stockmarkets, giving your money the opportunity to benefit from stockmarket rises, without risking your capital. The key for the risk averse is to select a bond that offers a significant (say 100%) capital guarantee. Even if markets fall over the term of your investment, you will not lose any of your capital. You will receive your entire investment back at the end of the term (provided you hold it till the closing date). If markets rise over the term, the fund will provide a return linked to a stockmarket index or indices.
Like any investment it is not risk free. You will lose out on any interest you would have earned if you had left the money in the bank, but if you think that interest rates will remain low for some years, this may not be a significant risk. You are also locking up the monies for a period of years, so it?s not to be used for emergency cash. And of course you need to check out the institution which provides the guarantee. A ?Too Big to Fail? bank is likely to be suitable, given that they are in effect guaranteed by their respective governments.
While you can take money out earlier if necessary you would lose the guarantee and returns would be compromised.
These 100% capital guaranteed funds work well to secure your investment profits. You could leave your original capital invested as before, but move the profits into a guaranteed investment. Your profit should be safe and sound and yet it will continue to benefit from stockmarket exposure and its potential for capital growth. If markets do fall over the term, your capital is protected.
Naturally moving money out of equity markets and into a guaranteed fund is not just restricted to profits, they can also be used as a defensive measure if you are unsure what markets will do next, or if you simply want more peace of mind about the level of capital you have exposed to stockmarket volatility. Your financial adviser would advise you on whether such a move is suitable for your objectives and circumstances at this point in time.
Guaranteed funds are also useful for people looking to move money out of cash. If you are not comfortable investing some or all of it directly in equities you could consider a guaranteed fund as an alternative. If however you need income or access to the funds you would need to consider a bond fund instead, or a mix of bonds, equities, a guaranteed fund and cash as determined by your financial adviser according to your objectives.
Guaranteed funds work well as a risk reduction strategy in an investment portfolio. Holding a diversified portfolio always helps to lower risk. Including a 100% capital guaranteed fund as part of the diversification lowers risk further because that capital will be protected whatever happens. At the same time the investment, along with the other assets in your portfolio, will help you earn returns over the longer term and protect your money from inflation.
When selecting a guaranteed fund, ensure it provides a 100% capital guarantee. Some are linked to around four different indices instead of just one. The diversification and global exposure should increase returns, but do ensure that gains made in one market cannot be eroded by losses in another.
There are various types of guaranteed funds on the market, and although at a glance they can appear similar, some are more risky than others and you may be better advised to leave your money in the bank. It depends on how they work and the guarantees offered. Ask a reputable financial adviser like Blevins Franks to explain the product to you, including all the risks, and establish whether it will be appropriate for your objectives.
By David Franks, Chief Executive, Blevins Franks
20th November 2009