Should private investors get out of equities during the current stock market turmoil? Kate Warne, market strategist at broker and financial adviser Edward Jones, says they should not be swayed by headlines.
Short-term slowdowns in the economy and property inevitably trigger worries about the stock market. Whilst we recommend continuing to own a diversified portfolio of quality investments during these slowdowns, some investors may still consider staying on the sidelines in cash.
We believe that’s not the most appropriate approach for long-term investors. We’ve experienced similar situations and, historically, they’ve been short and provided opportunities to buy equities at attractive prices.
Headlines are focused on the worst slump in property since the early 1990s. A downturn is never good news, as those in the industry face short-term hardship and worries arise about falling property values. Stricter mortgage requirements and higher mortgage rates combined with a slowing economy suggest more difficulties ahead for property, at least short term. The Bank of England (BoE) has signalled a reluctance to cut rates short term, so help in relieving the pain should not be expected.
To help prepare, we recommend meeting with your financial adviser to review your investments. This can help to ensure that you own quality investments, which can help you reach your long-term goals. You may need to rebalance to add fixed-income or growth and income shares or mutual funds (unit trusts) so that your portfolio has the appropriate mix of investments. Keep in mind that the volatility of equities is one reason to own an appropriate proportion of fixed-income investments, such as corporate bonds and gilts. Bonds have helped stabilise portfolios during past times when equities declined.
Since 1968, the FTSE All-Share has suffered 12 previous corrections (declines of 10 per cent or more).
The current correction started in June 2007, when the FTSE All-Share reached 3,479.
It may have reached its low point at 2,778 in March 2008, if there are no further declines below that level.
If this correction ended in March, it would have lasted slightly longer than average but would have been milder.
Keep in mind that it is impossible to predict short-term movements in the stock market.
Instead of trying to predict or avoid short-term dips, long-term investors should consider the opportunities they provide.
Many quality shares are priced attractively, and we believe there are good opportunities for investors who can look beyond the short-term worries.
Historically rising markets have lasted longer and provided larger gains than declining markets.
Investors and shoppers are concerned about rising food and energy prices, particularly those who remember inflation in years past.
Fortunately, the BoE is keeping short-term interest rates high and reassuring investors that it is taking appropriate steps to combat inflation.
Whilst those policies may be painful currently, the actions of the BoE and other central banks should help prevent any expectations of continued high inflation.
As a result, wage increases have remained moderate.
In addition, global competition remains fierce, limiting price increases on some items. Other prices have fallen due to cheaper production costs in the rest of the world, and that trend appears likely to continue.
Overall, whilst inflation may move higher in the near future, we believe the long-term factors that have kept it low remain generally in place. If you’re worried about inflation, consider owning dividend-paying shares individually and in mutual funds (unit trusts).
Historically, equity returns increase faster than inflation.
Unfortunately, in many cases, short-term interest rates on savings accounts appear high, but they don’t increase as quickly as prices. We believe it may be difficult to achieve your long-term goals if you rely primarily on short-term savings.
Investors constantly hear and see bad news that could cause them to hesitate.
If you let news headlines sway your decisions, you’re likely to make little progress towards your financial goals.
Reasons not to invest always exist, but, historically, owning a diversified portfolio of quality investments and letting it grow over time has been a successful strategy.
Edward Jones is a US firm with more than 275 offices in the UK, including a number in the West Midlands.