Lost a packet in the market crash?
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If you, like so many others, have found yourself nursing substantial losses on your once flourishing share portfolio, what is the best course of action?
Well firstly…DON’T PANIC!
Although you are doubtless experiencing a certain gut-wrenching despair at your losses (which is familiar to ALL experienced investors); losses are part and parcel of investing and you are certainly not alone; many of the country’s top financial ‘experts’ were also caught out…but it is your actions now which will determine how you come through this.
By now, most people will either have panicked and sold everything at a substantial loss, or will have been brooding upon their losses constantly and will be considering doing so very soon now out of desperation. But is this the right course of action, even though we all perceive that the markets will not recover any time soon?
Possibly, but the deciding factor is to make your decision in a calm and detached manner based on reasoned thinking.
Firstly, it is generally true to say that over time, markets always recover and so do share prices. The last time that I recall markets, or sentiment, being so battered was in the 2000 tech stock crash and before that, in the crash of 73. Both times, those who held out saw their portfolio values not only recover, but eventually surpass their former worth. Indeed, evidence from the times of biggest stock market crash ever, the 1929 Wall Street crash, shows that investors, who remained invested in the markets, did the best financially when the market recovery finally came.
This being said, in tandem with this knowledge, you must also critically review each individual holding and the market sector that it is in. Retail stocks logically look set to take the biggest battering in the coming years, but the market will favour the ‘old fashioned blue chips’ which will have the wherewithal and market advantage to last the course; hence the likes of M&S, Tesco and Sainsburys will undoubtedly survive, but also niche players such as Mothercare and Domino’s Pizza. Likewise, although resource stocks such as Rio Tinto and other miners will do badly in the interim; they actually ‘hold’ something of physical value and will probably fare well enough and recover in due course. Defensives such as utilities are without doubt a firm hold.
As you can see, there is a certain amount of common sense to deciding which stocks to hold and which you would be better sold off; much of this becomes somewhat intuitive once you start to calm down and review things in a detached manner. So for instance, diverse stocks such as Dignity (the UK’s biggest Funeral Directors) are unlikely to see a downturn in business and likewise Sage Corp (Accounting Software) although diminished in price, still stands as a good hedge against Sterling decline due to its majority Dollar earnings.
So with the big decision made and some stocks held for long term recovery and some sold off, what is the best use of the funds recouped?
Undoubtedly, the best option is to re-invest the funds to recover your losses. The good times for Equities will return…but not yet!
For now, you need to find a safe home for your cash until the time is right to make your money work for you again. In the current climate where interest and asset prices are falling, the time for holding Bonds has finally returned. Of course, I would only deem Government bonds as completely safe, but what you effectively get is a fixed rate of interest for a set period…and in this time of falling rates this is invaluable.
There are other considerations to bear in mind when buying binds such as the price / yield ratio, but right now, would probably be one of the best times to buy, before deflation raises the bond price and lowers the yield. Interestingly, it is possible to buy Euro denominated bonds (Euro Govt Bonds) which not only provide a Government guaranteed and underwritten return but also provide a solid hedge against further Sterling decline…something which is certainly on the cards. By the time Sterling is ravaged in the future, Bond Funds such as the ‘iShares 1-3 Euro Govt Bond Fund (Ticker: IBGS) or the M&G International Sovereign Bond Fund – Income Units (Ticker: MGISI – SEDOL: 3128891) will have preserved and modestly grown your capital in time to sell out and get back into equities.
By keeping a cool head and taking a measured approach to reviewing your portfolio there is every chance that once the current downturn ends, you stand to recoup any losses thus far and profit in the future…if you panic the opposite will probably come to pass.
* The above article does not constitute financial advice, but reflects opinions based upon the personal experience of the author, gained through many years in the markets. Likewise, the stocks and financial instruments specifically named are illustrative examples only and NOT recommendations to buy or sell. If you need professional financial advice based upon your specific circumstances, consult your IFA or other finance professional.
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