No hiding place for your cash?
Last updated 20:40, Saturday, 26 April 2008
Without wanting to state the obvious, there is no doubt that 2008 has been an extremely difficult year so far for investors.
January 21 saw the biggest fall in the FTSE 100 since the terror attacks of 2001, making the start of the year for stock markets the worst since records began in 1936.
We have also seen corrections in the value of commercial property and the signs are that residential property is going the same way.
There seems to be some debate as to whether the US is already in recession or, if not, it is just a matter of time before it is. That in turn will make the prospects of the UK avoiding a similar fate more difficult.
Anyone who needs food (can you live without it?) will have noticed their weekly shopping bill increasing steadily over recent months.
The Daily Mail recently calculated that food costs alone are rising at 15.5 per cent a year.
Prices have soared for three reasons – increasingly affluent populations in developing countries are eating more and better; government-mandated biofuel targets – 25 per cent of US corn production will go to ethanol this year; and poor harvests around the world.
I haven’t even mentioned the increases in gas, electricity, petrol and diesel – but surely someone must have their figures wrong, after all, the Government’s official measure of inflation stands at 2.5 per cent!
With the housing market in need of stimulus, the Bank of England has cut interest rates in the hope that mortgage lenders will pass this on (not the case so far) which would be good news for borrowers but another blow for savers.
So what do you do with your portfolio in the face of falling interest rates, falling property values, uncertainty in equity markets and rising inflation?
The FTSE-100 still holds some stocks which look good value, such as the large oil companies and the big drugmakers – classic defensive stocks. For those willing to broaden their horizons, emerging markets have produced good returns, although these markets have suffered recently. For the very brave investor, what I have recently seen described as emerging markets such as Vietnam and Nigeria might be worth a gamble.
Gold, another classic hedge against falling equity markets, is also worth a look and exposure can be gained by investing in collective gold funds. Index-linked gilts will also give some protection against inflation.
However, for most investors the priority is returns ahead of inflation without the risks involved in investing in far-flung markets.
Any investment portfolio should reflect the owner’s accepted level of risk and should therefore reduce the chances of any nasty shocks.
Diversification is touted as the key to reducing risk and having the correct asset split has been proven to enhance returns.
So unless you are confident that you can call what will be the best performing stock over the next 12 months, seek professional assistance to give your portfolio a spring clean and to make sure it is best placed to take advantage of any improvement in investment conditions when they arrive.
- Derek Baty is financial planning consultant with Armstrong Watson.
- For more information contact moneymatters@armstrongwatson.co.uk or call freephone 0800 195 2161.
