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Handling the Bull and the Bear

Investors always get very jittery as markets change from being described as “bull” to “bear” and historically have made some very poor decisions by acting in haste. A good investment portfolio, with a wide spread of diversified investments may well wobble a little, but should retain the majority of its value.

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For clarity, a bull market is a rising market, with most indices going up in value; and a bear market is one with falling market values. Folklore has it that bulls attack by thrusting upwards and bears attack by swiping downwards. Good investment managers can make money on either market direction, but the processes are likely to be different.

In a rising market, you can invest for growth by just buying assets in the market. This is a very simple process and can flatter poor managers, who would be lost in a flat or bear market.

In a falling market, managers have to be much more focused on the best performing assets or prepared to make more complex trades in order to turn a profit. Less than 5% of managers will consistently out-perform the market, so separating the best from the average and the poor can be troublesome.

The weekend Telegraphs had two articles that attempt to shine some light on market movement, the first on Saturday showing a table of sector performances over the last 12 months and previous years back to 2006. The full article is here; http://www.telegraph.co.uk/finance/personalfinance/investing/12150801/This-chart-shows-how-different-investments-perform-during-market-turmoil.html

The key message is the value of a balanced portfolio and the relative futility of chasing the “next big thing”. One years’ investors darling is the next year’s disappointment.

The second article on Sunday, went into more detail on bear markets, listing the last 11 back to the Wall Street Crash. The full article is here; http://www.telegraph.co.uk/finance/personalfinance/investing/12153754/30-years-of-bear-markets-history-tells-us-whats-next.html

Here, the message is that big falls are usually followed by big rises, so investors should not be rushed into selling up, but should take the longer view. For most private investors, the best thing they can do is contact their adviser and follow the advice given and not hurry to any emotional judgement.

Before doing anything dramatic, consider the following;

  • Remember why you went into investing in the first place – for “long term gain”. Unless you need cash now for living expenses, bide your time.
  • The only real loss is the one you realise when you sell the investment.
  • Cash is an acceptable store of wealth, but a poor investment.
  • Assuming you have a diversified portfolio, the actual movement on your investments should be less than the FTSE or S&P index.
  • Talk to your adviser, both to seek reassurance and to see when your portfolio is next due to be re-balanced. If you have changed your attitude to risk
  • If you do not have an adviser, ask us or find one via www.unbiased.co.uk and get your investments to match your attitude to risk and capacity for loss.
  • If you need cash for living expenses, ask which investments to encash first. Doing it wrong now could be expensive in tax, personal allowances and your ability to recover from short term investment fluctuations.

Contact me with queries

If anyone is looking for general advice, then please write in to the blog and I would be happy to help with anonymous advice posted here. Alternatively, please call us on 0116 253 5600 and ask to speak to an IFA, (Independent Financial Adviser), for a no-obligation discussion.

If you know you need formal advice, have a look at http://bankfield.net/personal/savings-investment/, or ask around for a recommendation, it might even be me.

Categorized: Risk Management , Savings and Investments , Wealth Management
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