Taking the Long View
Autumn 2007
"The value of investments can go down as well as up". How often have you read these words or similar? The answer is probobly many times: the statement has almost been obligatory on any piece of investment advertising or promotional material for the last 20 years.
Even so, when investment values do fall - as they did this summer - many people seemed suprised, shocked or even horrified. If you find yourself in any of thise categories, it pays to step back and view events with a longer term prospective:
- investment markets have enjoyed very favourable conditions since Spring 2003, when the second Gulf War started. For instance, the FTSE 100 Index hit a low of 3,287 in March 2003 and has risen almost in a straight line until July 2007. After a 100%+ rise, some retrenchment was probably overdue.
- Making changes to long-term investments in response to short-term market movements could seriously harm your overall returns. Investment values can rise just as suddenly as they fell in July and August. Over the last 15 years to the end of July 2007, missing just the best 20 days of UK stock market performance would have halved overall returns, according to research from Fidelity UK.
- Institutional investors, such as pension funds, generally do not switch large parts of their portfolios in and out of cash and shares to try and beat the market in the short term. Many such institutions benefit from regular cash inflows that they can use to rebalance the investment allocation of their portfolios.
- Selling and buying investments will normally involve costs and could result in a tax charge
- If you are a regular investor, for example making monthly pension contributions, a period of depressed investment values could mean that you benefit in the long term from buying at today's lower prices.
Sitting tight can be hard to do when the news headlines suuggest that Armagedon is imminent. In such circumstances it is worth remembering a rearrangement of the warning words which we started: the value of investments can go up as well as down.
