Recent falls in the value of the stockmarket has caused
concern among investors.
Should they run?
Should they hang on?
Warnings about the potential fallout from defaulting
American mortgage borrowers have been around now for quite
awhile, but when would these pigeons come home to roost and
what size effect would they have?
Well now we know I suppose.
But as some traders forecast ongoing market turmoil, what's
the real story? Perhaps some context would be sensible here.
Firstly, the stock market hasn't yet fallen that far.
Headlines of course will shout that the FTSE 100 index
dropped by over £60bn in one day. But this is against an
overall FTSE worth of £1.5 trillion, and so now does not
sound so bad.
Its important to remember that the 'Footsie' had plunged to
3500 in February 2003, so a stockmarket level of just over
6000 still represents a 70% plus recovery over four and a
half years. When you then look further back, the main
market indicator is still four times higher than after the
1987 "crash ". Dividends are excluded here - which would
add to the story.
Also, even though certain strains are starting to show, UK
Plc appears to be in a sound condition. So even though
European banks have been affected, it is primarily an
American problem.
It would also be true to say that this episode does show
what globalization is all about. This US housing market
panic may show itself anywhere in the world making banks
and investors nervous.
We must always remember that not all banks are rock solid.
If the bank's asset base including loans starts to go bad,
confidence will drain away. This means that the bank has to
pay higher money market rates to fund itself.
Nerves recently led the European Central Bank to pump a
large amount of temporary cash into the system. This was to
stop interbank rates rising massively.
So, is the panic over for now and what's likely to happen
next?
You will quite often find that in these times of doom and
gloom, there will be a short term bounce in share prices.
Investors are out there looking for "bargains", and it is
not unusual to see a lot more volatility.
The important thing to remember is that these crises are
often short term blips. But of course it may well prove
more serious than this.
However, let's remind ourselves of one of the basics of
long term investing. DON'T PANIC!
Stockmarket investing should not be about the short term.
If you want to gamble, go to a casino or racetrack. You may
win, you are most likely to lose. But long term investors
have historically enjoyed very good returns, and unless we
are entering a new paradigm, they will continue to do so.
The Financial Tips Bottom Line:
If you have a risk assessed portfolio with the right asset
allocation for you, there is no reason to panic.
If, however, you are unsure as to the relevance of your
invesments to your goals in life, check this out now to
make sure you are making informed decisions and not taking
more risk than you need to.
ACTION POINT
Review matters now if you are at all concerned. If you use
an adviser, ask what your asset allocation is. How does
this mix of assets help you achieve your goals? Do you have
the right mix of equities to bonds and property etc? Has
your adviser built you your own financial forecast?
All of the above are vital - dont delay checking!
----------------------------------------------------
Ray Prince is an Independent Financial Planner with
Rutherford Wilkinson plc, and helps UK Resident Doctors and
Dentists get the best deals on mortgages, protection and
investments, as well as helping them achieve their
financial objectives. Just visit
http://www.medicaldentalfs.com to get your free retirement
planning guide. Rutherford Wilkinson plc is authorised and
regulated by the Financial Services Authority.
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