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Investing in a falling market The sudden fall affecting so many stock markets during late February were seen by many people as being a threat to the ISA season – after all, why would people want to invest on a falling market? But in reality, this is a question that could be put the other way round. 
Nobody likes the idea of losing money, so investing in a falling asset is unlikely to appeal to most people. Yet the wrong time to invest in any asset is actually when it is at the top of its value cycle.Of course, identifying precisely when this is the case is difficult, and by the time most investors get to hear about a fast rising asset, most of the growth has already occurred. That is why most people prefer to use collective investments such as unit trusts, investment trusts and insurance company bonds. By relying on professional investment managers, we hope that they will be alert to future trends, not reactive to the past. Using any form of investment requires a commitment to put money in at some stage, so timing is important. Investing when markets are falling looks like “bolting the stable door after the horse has bolted”. But in fact, this need not be the case, if you can get your timing right. Look at any almost long term graph of most stock markets and you will see that the upwards trend growth is strewn with short term – in some cases not so brief – market reversals. So buying on a falling market simply means that the assets you are buying will be less expensive than the day before – you get more shares or units for the same money. Of course, if the market continues to fall, you will see the value of your investment deteriorate. But over the longer term, it is to be hoped that any losses will be recovered. And not having bought at the top of the previous cycle – however – short means that you stand to benefit a little more, when the recovery moves past the previous peak. In any event, some experts believe that recent market falls were not systematic – that is representative of an overpriced market – but relate more to the effects of currency market gambling that has left some major players facing large losses, resulting in them liquidating assets in order to cover their position. What this all means for the “ISA season” is that short term falls in equity markets should by no means be seen as a reason for not investing. Indeed, even if you believe that markets are over-valued and that a correction (a euphemism for a steep and sustained fall in values) is due, equity investments should always be seen as a long term proposition and if you are not willing to hold your shares or unity for at least five years, there are good reasons for staying out of the market altogether. Deposits may not offer the long term growth potential of shares, but they generally attract lower charges and are certainly less volatile. So while you may not do better than to match inflation by putting it into a savings account, you are unlikely to lose your money, should you need to access it quickly. 
What is more interesting is that the Chancellor signalled, last December, that the ISA market is to change (probably in April 2008) so that money initially invested in a cash ISA will then be available for transfer into equities, which is not currently possible. This will make investment strategies far more flexible.So even of you are not keen to enter the equity market right now, putting the current maximum of £3,000 into a cash ISA could make sense. If you require any further information about the services that we provide or would like to review your financial planning position, please contact us |