(Extract from Legal and General market update)
During this we have already seen the credit crunch stall the housing market, oil prices hit over US$130 a barrel and inflation increase towards 5%, few thought things could get much worse. Indeed, when the Federal Reserve bailed out America’s two largest mortgage companies, Freddie Mac and Fannie Mae, many were beginning to think the worst was over.
How wrong they were. The vultures and rumour mongers were soon back at work and, within just seven days, Lehman Brothers had filed for bankruptcy and Merrill Lynch had passed into the hands of Bank of America. AIG, until recently the world’s largest insurer, has been given a stay of execution with an US$85 billion loan by US taxpayers.
It is now over a year since the credit crunch first hit the US mortgage market and yet we seem no nearer understanding the full extent of the problems. If Lehman Brothers, a 158 year old institution, can go bankrupt, who else is going to fall?
It is this ongoing uncertainty which is really driving markets downwards and which will very likely keep them volatile for quite a while to come. Analysing the whys, however, does not help to answer your questions – which undoubtedly include ‘How much worse will it get’ and ‘how do I protect the investments I have?’
The first part of this question is almost impossible to answer. The future is never guaranteed in stock markets and, right now, there will be some commentators arguing for why this is Armageddon whilst others state that we have now seen the worst. A few of them will definitely be right, but we currently have no idea which ones.
The latter part is easier to address, however. Volatility and market surprises are at the heart of equity investing and these most recent events serve to highlight just how seriously the warning – ie: the value of equities can go down as well as up – should be taken. It is also why the first golden rule of investment planning is ‘don’t put all your eggs in one basket’.
You may not require access to your investments at this time, and therefore you have the opportunity to sit out the current worries and wait for sentiment to return. Things may look bad but if you were to sell out now, you would simply consolidate any loss you have already suffered. Then, if and when markets do rebound, you will also miss out on the upside.
However, with a widely diversified portfolio and adequate reserves for any emergencies during this period, you can stay invested and wait for normality to return. Yes, if markets fall further, your portfolio on paper will also fall further and you may have to wait longer before it gets back to where it was – but at least you are giving yourself the chance for this to happen. If you pull out now, your money is definitely lost.
The best advice is therefore to take a step back and remember why you made your investment. Be comforted with the thought that, if your portfolio is balanced and your needs are unchanged then this news should not be a reason to panic.
Of course, if you do have any worries, have decided you cannot live with these risks or would simply like to review your investments and investment allocation in light of the market falls, then we would be more than happy to help, so please do not hesitate to give us a call on 01482 658989, or email us.
Shane
