Shoring up against market turbulance
Summer 2007
Did you feel the earth move at the end of February?
On 27 February 2007, world stock markets experienced a serious tremble, with the US market falling 3.3%, its seventh largest ever one-day decline. All sorts of reasons were put forward, from the threat of capital gains tax on Chinese investors to an attempted suicide bomb in Afghanistan directed at the visiting US Vice President, Dick Cheney.
The turbulence was short-lived and six weeks later the brief flurry had been largely forgotten, with markets focused on a spate of takeovers, rumoured and actual. Where the market heads next is now the subject of some debate, given conflicting signs about the health of UK plc and the global economy.
One way to avoid falls in the stock market is to hold cash, which cannot lose value. But in such circumstances, holding cash has its own risks. While you would be immune to any stock market fall or inflation, you would also miss out on the benefit on any market rise.
If you want to keep your exposure to sharebased investments, but limit your potential losses, there are now a variety of investments to meet your requirements. For example:
- You could have a fixed term investment plan that gives you capital protection with a return linked to stock market performance. Several investment providers have this type of contract. National Savings & Investments regularly offers just such a plan, but the deposit-based structure makes it tax-inefficient for most investors, compared to other products.
- You could invest in a fund with ‘rolling protection’. This would mean that your capital is protected from loss beyond a specified level (usually between 0% and 5%) each quarter or each year. The higher the potential loss, the greater your exposure to the performance of the stock market.
- You could choose one of the range of funds designed to give a floor to the fund price of, typically, 80% of the highest-ever level. These types of fund offer a wider choice of underlying investment than the fixed term and rolling protection funds.
Past performance is not a guide to the future. The value of your investment can go down as well as up, so you may not get back the full amount invested. Some of these investments involve penalties on early redemption.
