10 January 2019
Stock markets around the world recorded significant falls in value during 2018. But is it all bad news for investors? We try to remain positive, as usual!
A financial adviser was telling me last week about one of his clients who, having experienced eight years of growth on his investments had decided on 2 January to switch most of them to cash. The adviser tried to dissuade him, saying that he should have done that back in September. Doing it now would just crystallise a loss. If only we had that infallible crystal ball!
This prompted me to check my pension fund and ISAs which, I found, had decreased in value by 2½% on average during 2018. Not too bad, I thought, considering the gains of previous years. But I felt compelled to check what I could have achieved, or suffered if my money had been invested elsewhere. Had I put everything in a Building Society I might have earned interest of 1½%. To get more I would have had to tie it up for 3 to 4 years – not conducive to accessibility or flexibility. If I had bought gold I would have lost only 2%. But if you look at the world’s main stock markets the damage caused by political uncertainty in 2018 has been immense. One of the worst performers was the FTSE 250 which fell by 15%. The FTSE 100 went down by 11.5%. In spite of Mr Trump rashly claiming just a few weeks ago that the value of the Dow Jones illustrated the success of his administration it ended the year 7.4% down.
But is this damage as bad as it seems? Had I held the ‘average’ share quoted on the London Stock Exchange at the beginning and the end of the year it would have lost 11½%, but this loss would have been partly offset by the dividends I received. And this points to another mitigating factor, price/earnings ratio, or the income stream received from a share relative to its market price. In fact, unless I am no more than a short-term speculator, I want to maximise the PE ratio – I want to generate a higher income for a smaller investment. I will, therefore, see a slump in value as an opportunity to acquire more of those income-generating shares at a bargain price. A colleague of mine frequently tells me that in Mandarin the word ‘crisis’ is represented by two symbols meaning ‘danger’ and ‘opportunity’. It’s a shame that this is apparently untrue, because the concept expresses very succinctly the situation of investors as we begin 2019.
What risks will you take?
At this point, I must stress that this blog in no way comprises investment advice. If you need advice you must consult your regulated financial adviser, and if you don’t have one we can introduce one to you of course. I mention this because Financial Advisers are obliged to ascertain your attitude to risk and long-term objectives before recommending any investment portfolio. The investor who bets on price-rises or falls in stocks or any type of commodity has an aggressive or even speculative attitude to risk. At the other end of the spectrum is the very conservative investor who leaves all his investments in cash, or shall we say, bank deposits. Even these investors will have lost money in 2018 as inflation has outstripped interest rates. Most folk fall somewhere between these extremes and will have a mixed portfolio. The important point, however, is that one bad year should in no way alter your risk profile. In assessing your attitude to risk you have already factored in the occasional bad year, so you need to stick with it.
What will change your attitude to risk is a significant life-changing event, or the anticipation of one. For example retirement, marriage, the arrival of a first child, or sadly the loss of a loved one. Those who for instance are obliged in early 2019 to cash-in a pension scheme on retirement may suffer from the plunge in share prices, but assuming that their retirement was planned their risk profile should have been altered some time ago and a move to something less volatile should have been implemented.
So my point is: let’s welcome this stock market drop and the others that will no doubt occur during the year ahead. They will all present canny investment fund managers with opportunities that will work in our favour in the long term. Just sit back and enjoy the ride, because with Brexit, Trump’s trade wars, budget crises in the Euro Zone and the disruptive rise of populism it’s going to be exciting!