The importance of balancing assets

Indeed, history may come to adjudge the last five years of the twentieth century in the same light as it does the corresponding period of the nineteenth – as one when normal rules apparently ceased to apply.

Whatever the case, current market values appear to be more in line with long term trends than the earlier peak. Nevertheless, it could be argued that the FTSE100 is now at the top of its range of possible values, so a further correction is possible.

What is rather more important is whether markets believe that companies have sound underlying financial structures that will allow them to continue producing dividends and capital growth. This is, of course, not an opinion formed in isolation, but in the context of economic conditions. Currently, the principal influences are interest rates, the risk of inflation, China’s growing economic power and, of course, the extent to which the sub-prime mortgage problems in the US will impact on world markets.

There is actually little reason for taking an overly pessimistic view of equity markets at the moment, although there will probably continue to be a degree of volatility for some time to come. Only if major investors start to lose confidence is there likely to be a large fall in market values.

It is, however, important to consider investment portfolios in the light of what might happen and how much “downside risk” you are prepared to accept.

All equity – and, indeed, property – investments should be seen in a long-term context. Shares are notoriously open to fluctuating values and property can take time to sell; but they both have historically offered potential for growth. What is important in any investment portfolio is to avoid too much exposure to individual sectors. If, for example, you have half your assets in pharmaceuticals, and a miracle cure suddenly renders previous medicines redundant, then your holdings will fall in value. This is, of course an extreme picture, but it highlights the dangers of relying too heavily on one asset class.

In reality, individual market sectors move up and down at different times for different reasons. For example, the shares of one UK bank (not Northern Rock!) have fallen more than 20% compared with the FTSE, during the last few months. Conversely, a tobacco manufacturer has outperformed the index by more than 10% over a similar period.

Following a diverse investment strategy – and this means looking at different types of shares in separate geographical areas as well as sectors, in addition to investing in completely discrete assets, such as property and even commodities – means that you will miss out in the full growth when one class does spectacularly well. But it also means that you will not suffer the full downside, when an individual class falls, relative to others.

China is a case in point where asset class diversification is offered, but care needs to be taken if some potential pitfalls are to be avoided. Despite being the world’s fourth largest economy this is still seen by some as an “emerging” market and therefore carrying higher risk. Yet investments via Hong Kong are subject to similar compliance strictures as London, which makes the risk less than in, say, Shanghai where the same rules do not apply.

This, as ever, reinforces just how important is it is always to seek independent financial advice before making any decision regarding your finances. If you would like any assistance, please contact your financial adviser.

If you require any further information about the services that we provide or would like to review your financial planning position, please contact us

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