By RAOUL RUIZ MARTINEZ features@algarveresident.com
Raoul Ruiz Martinez is a consultant for Finesco Financial Services Ltd., Glasgow and regulated to advise on capital investments in both the UK and throughout Europe under the MiFID regulation.
Does it make sense that so many people have been cashing in their investments? Even with the most cautious of plans, falling values make people think that now is a good time to cut their losses and keep what they have.
However, other investors look at the current economic situation in the opposite way and resist moving with the herd.
The rationale in thinking contrary to that of the raging herd is simply that when a stock market is down, it’s actually a good time to get into the markets and, if you’re already in, now is the time to put more cash in.
What madness is this, I hear you cry? In theory, the longer that market prices have been falling (let’s face it, it has been some time), then the greater the chance that they will rise. If you look at stock market indices across efficient markets such as the UK and the US, for example, March and April were telling months with increases in some of the main indices by 20 per cent and 30 per cent respectively.
These trends will not always stay and on the back of it all, these two heavily-debt-laden economies continue to produce some depressing economic statistics. No, the global recessionary period is not over and normally this is not a conducive environment for growth. To put it simply, if cash is returning (in real terms) less than zero per cent, who wouldn’t place their money in shares?
Looking back, and on every occasion over decades and, conceivably, centuries, you’ll see that sooner or later stock markets have recovered from some of the worst falls in living memory at that time.
Fair enough, you shouldn’t look at the past as a guide but somewhere in there it has a pattern and, yes, it is indeed possible that they could fall again before we see them rise again some more. But, as long as your investment horizon is long term of at least five years, current market conditions have the right appeal since you are able to buy so much more at lower prices. They are also liquid, i.e. you can sell them very easily at any time on the open market.
There can be further reassurance for overseas investors too. Those who choose to seek advice from a regulated financial adviser will be covered by the compensation scheme granted by the adviser’s regulator.
If this is for you then you should ensure that this extra layer of protection is upheld in the country where the advice is given. To take on further risk to capture higher returns, the adviser should have already explained clearly the workings of the recommendation to avoid the ‘Madoff Effect’.
Even going against the herd and investing in equity markets should be considered carefully. For reducing equity specific risk, spreading or diversifying your investments over different funds or shares works. This is particularly useful if you are considering investing by making regular payments in a rising market, where potentially you could get more for your money.
So to re-cap for simplicity – it’s probably worth staying in because over the medium to long term things will improve. Everyone has lost their head at one time or another with endless gloomy, wrist-slashing stories in the media about the economic meltdown. What the knowledgeable investor does is look at the bigger picture and grasp the fact that a low entrance cost to markets is fantastic for new investments, if they are being made for the medium to long term.
OK, a little self-serving I know, but seek the advice of an Independent Financial Advisor (IFA), who can provide you with an in-depth analysis of your own personal situation and provide comprehensive recommendations on the best overall strategy. Also, there are plenty of useful internet tools (some of them also independent) to help you make these crucial decisions. Ensure you’re well informed, and get your money working as hard as possible, even if it means using whatever comparative tools you have available to you to verify any investment recommendation.
Please note that the purpose of this article is to provide technical and generic information and should not be interpreted as a personal recommendation or advice.
Raoul Ruiz Martinez can be contacted by emailing features@algarveresident.com
