Thursday, 3 September 2009

Is now a good time to invest?

I often attend presentations by Fund Managers and other Investment Professionals, usually in the hope that I shall find some ‘inside track’ of knowledge and insight that is going to make a difference. Most times I come away wondering what I have learnt that I didn’t already know!

The Specialist takes great pains to explain all the positives that underlie the current situation and just as you are beginning to think that the overall message to take away must be a positive one, he goes on to list an equal number of reasons why we should all be gloomy.

All this bet-hedging used to be a great irritation to me until I cottoned on to the bigger picture – Nobody knows what is going to happen and there is in fact no inside track. All we can ever do is weigh up the relative pros and cons and draw our own conclusions.

There are many soothsayers who would have you believe that the recent spectacular rally seen in most developed markets is about to end in tears, matched, funnily enough by as many who would have you believe that the recovery is here and markets will not look back till they regain the highs of a couple of years ago.

My own feeling is that while there is still much to fear, things do look undoubtedly better than they did six months ago. There will, I am sure be more bad news to come, particularly from the Banking and Financial Services sector, but the fact is that an awful lot of the ‘toxic’ assets that we all feared so much have simply been written off already, and cannot be so again.

From the point of view of making investments, the old rules remain as true as ever they were:

• Above all, time will be the investor’s friend. A short term view encourages investors into more risk than they should be taking.

• Diversification is everything – across asset classes, geographical boundaries and fund management groups. Your eggs are invariably better spread across a number of baskets than addling in just the one.

• Last year’s wonder fund or sector could be next year’s dog. Track record can tell you a lot about how things might be in the future, but only if you look over a long enough period. If you can see evidence of how a manager or fund has coped well with hard times in the past then you have a decent hope that he might do so again in the future. A manager who has never had to cope with trouble may not recognise it or know how to deal with it when it arrives.

• Know where your risk lies and make sure that you have it balanced by sufficient low or no risk assets elsewhere – bank deposits, premium bonds and the like are perfect for this. A well considered mix of black and white is usually better than ‘Vanilla Grey’.

• Stay on top of the changes to your portfolio that time brings. Your higher risk holdings will ultimately deliver more growth than the lower risk ones. As a result if you don’t occasionally ‘rebalance’ back toward your original philosophy then it is likely that the aggregate risk profile of your holdings will steadily rise over time.

Markets may now be considerably higher than they were in March of this year. However, even allowing for over-valued banks and financials at the peaks seen in 2007, their levels are still way below where their genuine highs should be, so for the long term, now should still be a good time to pick up decent assets a reasonable prices.

So – Is now a good time to invest? On balance, Yes I think it is, but always make sure you diversify well and keep risk under control. The age-old warning that assets can fall as well as rise in value has taken on a resonance all of its own in recent months. Taking note of the rules above should help in managing those ups and downs.

2 comments:

  1. A good summary of the current situation and a sensible balanced viewpoint, plus a suggestion of keeping with a diversified portfolio, but could you stick your neck out a little further and even though you may not want to recommend individual companies, could you recommend particular sectors (banks, commodities, utilities, etc) to invest in, and where should one invest - China, India, the US?
    Keep up the good blog.
    Laurie

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  2. Thanks for the feedback Laurie. It's good to know that real people are interested.

    I guess my response to your very pertinent question would be that any formal investment recommendations should by definition be completely client-specific and as such not really be the domain of the more general blog.

    That probably sounds like a cop-out, but each investor has a very different appetite for risk, a different set of objectives and expectations to the next one.

    Keep up the good questions, and thanks.

    Sam

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