Financial crisis: The options for nervous investors?

Financial crisis: The options for nervous investors?
For everyday investors who have so far stood firm and headed the calls not to panic, they must be wondering whether their courage will pay dividends.

By Paul Farrow
Published: 9:10AM BST 30 Sep 2008

The FTSE100 has fallen to four year low leaving investors wondering whether worse is to come.

Henk Potts at Barclays Stockbrokers, said: "Inevitably this will be an extremely volatile market for sometime and there are some big hurdles to overcome. But many people with a brave heart are seeing this as a buying opportunity - our ratio of buyers to sellers yesterday was 72:28."


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This time a year ago the overall message was also to stay calm – although one stockbroker was a little more frank: "If you are going to panic, then panic early."

Those that refused to hold their nerve and did indeed panic, will be feeling smug right now because the bear market has long arrived. The FTSE100 has fallen from 6,200 to below 4,600 since 2004.

All but the most hardened investors will be wondering whether it still makes sense to cut and run. It is easy to be advised to stick with it, but seeing the pounds drop day by day is difficult to take – and with further woe widely predicted then who can blame investors from saying enough is enough.

Mark Dampier, head of research at Hargreaves Lansdown, said: "In all honesty no one has experience anything quite like this so any view is just that a view. In the UK the financial/property crisis will herald a UK recession for the whole of 2009. But stock markets are a discounting mechanism and will bottom well before the economy does which makes it very difficult to judge, as bad news will predominate.

"September and October are notoriously bad months in the stock markets and are living up to their name but we are now nearer the end game with markets. The politicians in the US will have to swallow their pride and egos as John Major did in 1992 and comeback with a package. This is not a bail out of Wall Street rich kids – it hits everyone and especially those in the real economy. It will be messy until economically illiterate politicians are made to see sense by the markets.

"At times like this I am reminded of the words of St John Templeton that 'the time of maximum pessimism is the best time to buy'. We are surely getting very close to that point."

Andrew Merricks, at Brighton-based Skerritts Consultants, says: "Thinking logically, not every company will go bust (far from it), so there must be a floor to which valuations can fall before bouncing. Perhaps we need to take notice of other regions than the UK, which is traditionally where we feel most comfortable. The positives are, admittedly, relative, but there are some. Firstly, the dividend yield on the FTSE All Share has exceeded the yield on the 10-year gilt.

"This historically has been a great indicator to future share price rallies, with the last time this happened being in March 2003 just as the markets took off. The other similarity with 2003 is that there were articles at that time questioning whether equities would ever work again and we had entered the “capitulation” stage, when the everyday investor had given up hope. Today feels somewhat similar. The world will be a different place as a consequence of September 2008. If this is so, it should be at the top of everyone’s priorities who has savings, investments or pensions to reassess how theirs will fare as events unfold."

Boll Doll, vice-chairman and chief investment officer for global equities at BlackRock, said: "The current situation ranks among the most difficult investors have faced in memory, and perhaps in generations. De-leveraging and re-pricing of risk have been exacting a heavy toll on the housing, credit and equity markets. The volatility in oil and other commodity prices, coupled with uncertainty about the direction of government policy and the outcome of the coming election, have made it difficult for investors to find their footing.

Nevertheless, investors should recognise that we are in the midst of panic and outright liquidation conditions, which are usually signs of the climax in selling. While the U.S. financial sector (which has been at the heart of the problem) has experienced a significant downturn in recent weeks, that sector has not broken through the lows it established in mid-July. To us, all of this suggests that equity markets are still in the midst of a bottoming phase."

Anthony Bolton, the Fidelity fund guru – who has delivered the goods – says that if you find it difficult to stay invested in the bear market and are panicked by the bad news, then perhaps equity investing is not right for you. If that's you, cash is the obvious alternative. You can get rates of more than 6.5 per cent on the market. Bolton has started to buy shares over the past few days.

Gold is the other classic safe haven and despite its price rising in recent days as investors search for low risk assets, it is still viewed as such. About a year ago, the gold price was $667 an ounce, but it rose to a peak of over $1,000 on 17 March – coinciding with the collapse of Bear Stearns – before falling back to its current level of around $900 this week.

If you are worried about losing money, consider a guaranteed equity bond (Geb). These are fixed-term savings plans that pay out a proportion of any gains in the stock market index or indices to which they are linked. If the market falls, the initial investment is returned in full. But be aware that any index growth excludes dividends, which make a huge difference to overall returns. And ensure the plan gives you a cast iron guarantee that your capital will be returned in full whatever happens to the stock market.

For those happy to remain invested in shares, Bolton says to focus on large, good quality companies. Avoid at all costs smaller and medium-sized companies with weak balance sheets, he says.

And if you want to stick with it then take these words from Maynard Keynes, perhaps the most famous investor of them all for comfort. He wrote in 1937: "It is the one sphere of life and activity where victory, security and success is always to the minority and never to the majority. When you find anyone agreeing with you, change your mind. When I can persuade the board of my insurance company to buy a share, that, I am learning from experience, is the right moment for selling it."