If you are a market watcher you cannot fail to have noticed
that the Dow has finally hit 13,000 and the Indonesian stock
market broke the 2000 level on April 26. If you read my report
on the FPI seminar in Bali in March you may recall that the
fund managers were predicting another double digit rise for
global markets this year. We seem to be well on the way to
that prediction at a surprisingly rapid rate. The other prediction
that the US Dollar would fall to $2 to one pound sterling
has already materialised. Why are markets still doing well?
Continued good profits and activities on the merger and acquisition
front are a couple of reasons. But negative factors also abound,
including the US twin deficits, the slide in the US property
market, the continuing high price of oil and the endless war
in Iraq. So are the markets defying gravity?
In the month of May you go away
This was a common saying some years ago when stock markets
often did well in the first four months of the year only to
fall back in May and continue to slide until they picked up
again towards the end of the year. In view of the strong start
to the year this may well be another year when that applies.
But we can never be sure and trying to double-guess the market
can result in tears. However, if you have made a good profit
and foresee a need to access your investment in the near future
then this could be the right time to take profits. But I would
not suggest making major changes. The best strategy as always
is to stay the course and weather the storms as they come
because if you are not on the boat you are not likely to get
to your destination. Put another way, if you do not stick
to your long term financial plans you will not achieve your
financial goals. Remember that you should always have enough
cash available to see you through a year or two and meet all
likely contingencies. That way you need not worry about the
short term movement of markets because you will not need to
draw cash from them.
Old money and new money
There is a good case however for taking some profits and that
applies particularly to contractual savings or retirement
plans that have been running for a number of years. If you
have such a plan you should now be seeing the benefit of cost
averaging. This is where a regular contribution buys more
shares or units when prices go down and fewer when prices
rise. Provided that profits are taken at or near a peak this
will result in a far greater return than had the money been
invested regularly into a non-volatile asset such as a bank
account. Anyone who made regular contributions to such a plan
during the long bear market of 2000 to 2003 should now be
benefiting from the significant rise in the markets since
then.
The technique now is to move some or all of those gains from
stock market funds into more balanced or conservative funds,
thus locking in the gains and protecting them against future
falls. This money is now treated as ‘old money’
and will form a solid core of the plan. If the plan has a
number of years to run any further contributions or ‘new
money’ should continue to be fed into the more aggressive
stock market funds to generate additional gains without putting
the core of the plan at risk. If the markets should fall in
the near future (and for the purposes of the plan it is actually
desirable that they should!) the contributions will once again
be buying additional units. When the markets have risen again
significantly the operation can be repeated.
Why savings and retirement plans need monitoring
The above shows why it is important to monitor a long term
plan. It does not need following on a daily or even monthly
basis but periodically it should be reviewed and adjusted
for the reasons stated above. Also, funds that shine today
may lose their glitter over the years so need to be monitored.
A stark statistic is that of the top five funds in the UK
in 2000 not one was even in the top five hundred five years
later! So if you have a savings or retirement plan of this
sort (usually with an offshore life company) make sure you
ask for an early review with your financial adviser. If you
no longer have one contact our ‘abandoned orphans’
department for help! There are thousands of plans out there
floundering through inaction or through being invested in
the wrong funds. Due to the charging structure of these plans
it is often more economic to restart a suspended plan than
begin a new one.
What if you have a portfolio?
If you have a portfolio of shares or stock market funds now
is a good time to do some rebalancing. If you are in for the
long term you should still retain the bulk of your holdings
but you could take some profits and move them into other asset
classes. But where is the best place to turn when stock markets
fall? An easy option is cash where you should now be able
to get at least 5% per annum in an offshore deposit account
in US Dollars or Sterling. Another is a commercial property
fund. The strength of this sector has just been highlighted
by the recently announced sale of HSBC’s tower block
in London for over one billion pounds, more than double its
construction cost when it was completed in 2002. Gold has
done well in the past three years and will continue to be
a good hedge against a falling dollar. Gold can be accessed
via a bullion or mining fund. Another option, more suitable
for those already with ample assets since it involves a four
to five year commitment, is a ‘structured note’.
This is basically a deposit linked to a portfolio performance
but with capital protection. This means that you can enjoy
the fruits of a rise in the markets but still get your money
back in full in the worst case market scenario.
So all in all there are many actions you can take if you feel
the good news in the markets is coming to an end. But the
most I am suggesting is an adjustment; staying the course
is still the best strategy. It’s just a question of
navigating around some of the rocks that may not even be there!
Colin Bloodworth is a senior adviser with Financial Partners
International. The opinions expressed are his own. If you
have any questions related to personal finance you may contact
him at 021 520 8099 or colin.bloodworth@financial-partners.biz
