Just so advice

6th November 2008

The stockmarket appears to be in terminal decline, my cash may or may not be safe in the bank, inflation is rife and the economy appears to be heading into recession, if it isn't there already. Help.

Rudyard Kipling said something about keeping your head while all around are losing theirs. Not an easy feat to carry off at the present time.

What help is it you need exactly? I received an email yesterday from a client who asked whether it would be wise or foolish, risky or shrewd, to invest some of his pension fund in equities at the present time. The only honest answer I could give him was that it would seem to be all four of those things.

Wise because it is generally considered an opportune time to be buying equities when the price is falling. Most people tend to do the opposite and buy equities when the market is rising and, worse, hold on to them for too long.

Perversely, it might also be foolish at the same time because, generally speaking, it is almost impossible to call the bottom of a market and, having bought the equities, they might continue to fall in value. The difference between wise and foolish might simply be a question of how long you hold them for.

Risky, yes, but really only if you need the proceeds from the purchase of those shares in the short term. If you have short-term needs, invest for the short term and stay away from long-term assets.

Shrewd because, in 2015, you could be looking at an equity portfolio that has returned far more than a current investment of 100 per cent in nice, safe cash.

Inflation is certainly higher than it has been for many a long year. So what? Some commentators are already predicting it has peaked and that we will see a very rapid fall. This may allow the Bank of England to make further base rate cuts to stimulate the economy.

Recession is a truly hateful word, isn't it? It tends to be measured in arrears because the real data that determines whether an economy is in recession tends to be revised over time. However, that is a technicality. Recession is certainly meaningful for those people who lose their jobs or whose businesses go bust.

To date, no UK consumer has lost any of the cash they have in a bank account. That does not make it any less an uncomfortable ride. I would guess that 90 per cent of the phone calls we have taken from clients have been about the security of their bank accounts rather than the decrease in value of their investment portfolios. That says a lot about understanding.

None of us likes to see the capital value of our investments fall but we know there is the possibility that this might happen.

None of us really accepts that our bank accounts ought to be exposed to risk, which is why I suspect the Government is quick to step in when peril materialises.

What can I do to help you? I hope some of the following is sound advice. I accept that it may sound full of platitudes but I hope it is meaningful.

Don't panic. The fact is that periods like this do happen, it is just that this one seems so sudden and threatening.

Be diverse, as this usually pays off in the longer term. Make sure you have emergency cash. Do not worry too much about your property going down in value unless you are planning to sell it in the near future. Do not sell all your equities and crystallise a loss.

Review your investment portfolio on a regular basis and take advice. If you have made gains in the past, your portfolio may not have fallen as much as the headline rates that you read about. This is particularly the case if you have a good spread of investments.

If you can, and I fully accept that some people cannot, take the long view, certainly over five years and preferably over 10 years because it is over long periods of time that active investment portfolios tend to give the best value.

Kipling was right about one thing, there is simply no point in losing your head just because everyone else appears to be losing theirs.

This article was first published by Money Marketing.

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