How to Ride Out the Stock Market Storm
already though stock markets are generally having a bad time of it at the moment, as an investor there is no need to panic unduly. There are several strategies you can adopt to ease the pain and to protect your portfolio in the current ecosystem. Let’s start with a little perspective on the situation.
At the start of 2012, it’s worth looking back at 2011. There was the major natural catastrophe in Japan for starters. Then there were problems in Greece and other sovereign European states, culminating in threats to the Eurozone in addition as the Euro itself – plus of course the downgrading of the US credit rating. There was no doubt that the media seemed to revel in the bad news and as bad news sells, this is sure to continue.
Certainly investors voted with their feet, as they staged the biggest retreat from the stock market in 20 years. According to the latest figures from the Investment Management Association, private investors pulled a record £864m from investment funds in November, bigger than the retreat from the crisis of 2008.
But what effect did all these problems truly have on the markets? Well, in Europe, unsurprisingly most markets ended down for the year. The FTSE 100 lost 5.6 percent, whilst Germany’s DAX lost 14.7 percent. Interestingly, Far East and Emerging Markets also suffered, approximately along the lines of Europe. Overall Emerging Markets were down 14.5%, Japan was down 14.1% and Pacific ex Japan lost 10.9% – so simply avoiding European equities was not a solution.
However, as reported in the Guardian, in the US, the Standard & Poor’s 500 index closed 2011 just a fraction of a point below where it started the year. The S&P closed at 1,257.60, compared to 1,257.64 at the end of 2010. So its loss for the year was just 0.04 point. The Dow was up 5.5 percent for the year, whilst the Nasdaq composite index lost 1.8 percent.
So the US is not looking in too bad a shape and there are encouraging trends there in addition, with some improvements on the unemployment and housing market fronts. clearly there is an election later this year so the issues of debt and deficit are likely to be put on keep up until 2013, but there are at the minimum glimmers of hope.
Away from equities, bonds did well in 2011 which is slightly surprising as they usually do badly in times of rising inflation. Long term gilts (over 15 years) returned 24.3%, index-connected gilts returned 15.4% and all gilts on average returned 14.2%. Corporate bonds which are typically riskier than gilts returned 7.1%. in other places, gold returned 25.3%.
Because of this, well diversified investors will have been cushioned from the fall in equities via their holdings of gilts, bonds and other asset classes.
So how do you keep your portfolio ticking over in these difficult times?
Well, firstly, by playing a long-game. As investors in equities know, the whole course of action is a long-term game, and losses are only crystallised once the funds are ultimately sold. So don’t panic – and keep up onto your equities.
Secondly, you should ensure your portfolio is diversified. If you have a well-diversified spread across a range of asset classes, it is more than likely that if one area goes down, other asset classes should help provide protection.
Thirdly, you should look to rebalance your portfolio. As 2011 was a fairly volatile time for markets, it is likely that the portfolios of most investors are slightly skewed, and will need rebalancing to get back in line with their form asset allocation. This might average selling some gilts or bonds that performed well last year, to get their portfolios back in line.
Fourthly, you should consider a focus on income. Higher yielding stocks tend to outperform low yielding stocks over the long term and can contribute towards total returns if the dividends are reinvested. In fact 2011 was a not a bad year if you invested in good quality, long-term, dividend-paying companies. According to Capita Registrars, 2011 was a record year for dividend pay-outs, with investors in UK companies getting a £67.8bn bonanza – up 19.4% on 2010. Record dividends consequently provided a real bright identify for investors in an otherwise gloomy world.
Finally, if you are nevertheless looking to invest but are a little nervous, you should consider “pound cost averaging” – the time of action where you invest amounts on a regular current basis instead of as a lump sum. This course of action helps to smooth out your investment returns, as when proportion prices are low you end up buying more shares – but clearly fewer when the price is high. So when the market is depressed, you assistance by buying more shares, which will be good news when the stock markets rise again.
So the picture for 2012 may nevertheless look gloomy but it should be borne in mind that the markets have priced in a good deal of the problems already. Whilst the short-term could keep tough, particularly if something emotional happens, like Greece defaulting for example, it should be remembered that on a historical price/earnings (P/E) basis, equities are now undervalued. So as mentioned above, holding on for the medium to long term would seem to be the sensible option.
A review of your portfolio also makes sense at a time like this, so if you haven’t done so already, contact your local independent financial adviser, who will be able to help you with an appraisal of your overall financial objectives and strategy.