Despite the recent market volatility, opportunities to grow your nest egg are out there
Doom and gloom might be the order of the day – as politicians struggle to control the EuroZone debt crisis, plus a worsening UK economic outlook – but the medium- to longer-term forecasts remain much brighter. In particular, leading fund managers agree that future market conditions appear more favourable for investors, providing your money is in the right place.
2011 will certainly be remembered as a year of global market volatility, kicking off with unrest in the Middle East and North Africa, followed by devastating earthquakes in Japan and New Zealand. More recently, the EuroZone has taken centre stage.
All of these events have contributed to a climate of uncertainty, where even the smallest piece of economic news can send markets into a spin.
Yet the fundamentals of stocks and shares equities themselves offer greater encouragement. That’s because the present stock market issues are mainly due to a lack of confidence over the inaction of European politicians in tackling the EuroZone difficulties. The balance sheets of the corporate companies themselves – particularly large blue chip companies – look strong.
While share prices are currently low, the FTSE 100TM has already grown by 10pc since the lows of early October. Many industry experts agree that the medium- to longer-term prospects look encouraging, here’s why:
Dividends to reach a three-year high
Dividend yield payments – a share of the profits companies pay to investors on a regular basis – are on the increase, and 2011 looks set to see the fastest growth in dividends since 2008. This is particularly the case for the UK dividend market, with Capita Registrars reporting that some companies were increasing payments to investors by as much as 100pc mid-way through 2011.
Even allowing for the subsequent market volatility, dividend payments still rose by 16pc between July and September, compared to dividend payments over the same period a year earlier.
Dividends have always been an important part of equity returns. While equities can rise and fall in value, dividends are generally more stable. This means they can prove a valuable way of providing an income or supporting growth in the value of your investments.
It’s ‘time in’ the markets, not ‘timing’
Investing your money should always be viewed as a medium- to longer-term commitment. Sadly, many investors make the mistake of encashing their investments after only a short-term, especially when the markets suffer a downturn. Having originally agreed a longer-term investment horizon, this about-turn in strategy often results in losses.
While past performance should not be considered a guide to future returns, historically markets have recovered strongly, over time, from significant crashes. According to Hindsight statistics, in 1987, ‘Black Monday’ saw the FTSE 100TM (total return including dividends) fall 31pc – but five years later it had grown by 120pc. After the devastating 9/11 attacks in 2001, the FTSE 100TM dropped 11pc; by September 2006 it had risen by 57pc.
Time – not timing – is the key to a successful investment strategy. Generally the longer you are able or prepared to retain your investments, the greater the potential return.
A balanced approach
Not that investing has to be solely about stocks and shares assets. Essentially there are four other types of assets that can feature in your overall portfolio: cash (deposit-based savings), fixed interest (loans to the Government or companies), property and commodities (e.g. gold).
Each asset class has its own positives and negatives. By placing your money into an investment fund that contains a range of asset classes, you can reduce the overall risk to your capital. That’s because when one type of investment is performing less well – such as property recently – others may produce higher returns.
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The medium- to longer-term outlook for growing your money might appear encouraging, but is your nest egg suitably positioned to take advantage of potential market opportunities?
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