Stockmarket: what should investors do now?

Stockmarket: what should investors do now?
The FTSE100 dropped below the 5,000 barrier in the aftermath of the naked short-selling ban in Germany and the ongoing euro crisis.

By Paul Farrow
Published: 3:07PM BST 21 May 2010

Investors had been enjoying a market revival since shares hit their March 2009 lows. Markets had become more volatile in recent weeks but many fund managers had ruled out any possibility of a full-blown stock market crash.

However, the eurozone crisis is worsening and many analysts are predicting a double-dip recession and further market falls.

Paul Niven, head of asset Allocation at F&C, said: "Equity markets have entered into a technical correction, with major indices, such as the US S&P 500 falling more than 10pc from recent peaks. The VIX index of 'fear and greed' (which measures the volatility of the S&P500) has hit 13-month highs and is back trading at levels only seen during the 2008 meltdown.

"The way that markets are now behaving is suggestive of a move to pricing in renewed and significant economic weakness and the danger for investors is that market action will begin to negatively permeate economic fundamentals. It may be that capitulation is required in the near term to mark a short term trough in risk assets."

Financial advisers admit that no one can predict what will happen and suggest the best way to avoid boom-and-bust cycles is to make objective investment decisions that ignore fashions. What's more there will be some fund managers who argue that the volatility will trigger buying opportunities, although it is understandable that caution is the operative word for many investors at this juncture.

The advice from the great and the good, more often than not, is not to panic. There is the well-trodden argument from Fidelity that "it's about the time in the market, not out of it that counts''. But that can seem flippant when it comes to the prospect of losing your hard-earned cash.

Experts say that if you haven't already, it would be well worth reviewing your holdings to see if you are overexposed to any asset class or classes. Diversification and getting the balance right are vital.

Patrick Connolly at AWD Chase de Vere said that most people don't appreciate the risk they are taking when stock markets are going up. They only realise when markets are going down or are more volatile and then can panic and sell out at entirely the wrong time, he said.

"Too often investors buy at the top of the market when they are feeling bullish and sell out at the bottom when they are feeling negative. They should not allow short-term sentiment to influence their decision," said Connolly.

"The right approach is to hold a level of cash and then a diversified portfolio including shares, fixed interest and commercial property. These different investments need to be held in the right proportion to meet the requirements and risk profile of individual investors."

AWD Chase de Vere suggest that a diversified portfolio could include investment funds such as, PSigma Income, M&G Global Leaders, Cazenove European, Threadneedle American, JPM Emerging Markets, M&G Property Portfolio, Fidelity Moneybuilder Income and Schroder Strategic Bond.

Connolly added: "While panicking and selling is likely to be the wrong approach, for those who are concerned it is sensible to review their existing holdings and ensure they have the right level of diversification in their portfolios."

Adrian Lowcock at Bestinvest said that investors should look to have exposure to other asset classes, such as bonds, commercial property and absolute return funds.

His favoured funds in each of these sectors include Invesco Perpetual Tactical Bond, Henderson UK Property, Standard Life Global Absolute Return Strategies. He added: "The EU/IMF bail-out package will struggle to contain the issue and markets have responded accordingly. Investors should look to diversify their portfolios to reduce volatility but it is likely to be a bumpy ride in the short term."

http://www.telegraph.co.uk/finance/personalfinance/investing/7749761/Stockmarket-what-should-investors-do-now.html