Don’t add yourself to these gloomy figures

Date Published:16/10/2008

Date Published: 16/10/2008

Over the last few weeks, it is unlikely that there is anyone who will not have heard about the turmoil that has engulfed global stock markets and banks. I do not intend to re-iterate what we have read, heard and, perhaps, experienced.

However, over the recent past there have been some significant ‘revelations’.

  • Failing banks are not normally obliged to pay back all of your deposits over the now increased amount of £50,000 guaranteed by the Financial Services Compensation Scheme.
  • Equities, and other assets, are risky.
  • History repeats itself. Who remembers BCCI?

The World Economic Forum places UK banks 44th out of 134 countries for soundness behind Peru and El Salvador. This is after the Government pledge of £50bn to bolster the balance sheets of UK banks.

Interestingly, the same report tells us that we have the lowest incidence of malaria and the best legal rights out of any country, which is good. In addition, the UK is 77th out of 134 countries in respect of Government debt and 105th out of 134 countries for Government surplus/deficit, which is not so good!

Recently, I have taken calls from a number of clients and professional contacts seeking my opinion on various bank accounts paying far higher interest rates than others.

There are many who considered Icelandic banks, or others including some UK banks paying higher rates, as a home for their savings whilst other types of assets including property and shares are falling in value.

My response has been that many eminent mathematicians and economists over the years have proved that risk and return are linked. If the return is higher, so must be the risk.

In every instance, I advised my clients to remember their long-term financial plan and to avoid being distracted by chasing returns and taking additional and unnecessary risk.

As an investment professional, the last week has been rather daunting. For the investing public I am sure that it has been simply terrifying.

Psychology

It will be important to understand a little about investors’ psychology …

Investors may be so frightened that they decide to sell their investments and hold cash in a bank account, particularly in light of the guarantees presently available.

However, selling into the current market will only mean that you lose real money now and will not be invested to take advantage of the upturn that will inevitably happen. The problem is that no-one knows when this will happen.

Private investors generally invest in actively managed retail investment funds, 75% of which will underperform the market, historically by around 2% p.a. Added to this, the fact that private investors allow emotions to influence their decision-making will mean that they are likely to underperform these funds by a further 2% p.a. as sales and purchases may be unfortunately timed.

This will mean that there will be likely to be total underperformance of 4% p.a. In these difficult times, I would urge investors not to contribute to these statistics.

Don’t sell low and buy high. You will lose money.

Investors with a properly-thought-out financial plan and investment strategy will find themselves best placed to deal with the emotional turmoil of these difficult investment conditions, along with being best placed to take advantage of the upturn when it arrives.

I would urge investors not to miss out on any of the best day’s returns as doing so will damage long term investment returns.

Conducting a proper assessment of your investment risk tolerance, requirements and objectives leading to a properly constructed financial plan is important.Investors should seek out good quality professional financial planning and investment management services. These will pay dividends in the long run.

balanced stones