Where do I invest now?

In a more topical article this month, Ivan Doherty looks at the investment implications of recent world events.

After the recent attacks in the US, the first reaction was one of horror at the human consequences, followed by concern regarding the future of the world economy. Many investors are quite naturally concerned about the potential effect on the value of their portfolio. In this article I will briefly discuss the future prospects for the markets and offer some advice to personal investors.

• Market Prospects

  At the time of writing it is difficult to predict how the markets will react to current political and economic uncertainties. On the first day of trading after the tragedy the Dow Jones Industrial Average lost more than 7% of its value in the largest one-day points fall in history.

  Support came however in the form of concerted interest-rate cuts around the world, from the US Federal Reserve, the European Central Bank and the central banks of Switzerland, Canada and Sweden. Market conditions look to remain volatile as analysts keep a careful eye on how the markets react to developments.

• Don't Panic

  For those of you who are already invested in the market, the first message must be to remain calm and to seek the advice of a professional advisor before making any hurried decisions. It is important to remember that markets generally over-react to both good and bad news. In the short term, markets will no doubt continue to behave erratically - it should be remembered that this was the case even before the recent suicide attacks on the USA.

• Invest for the long term and spread your risk

  I recommend a minimum investment term of five years. The longer the term the less one is affected by short-term movements in the equity markets, which translates into lower risk. If, for example, you think you might need access to your capital in the next five years to buy a house you should keep your money in the bank or in a money market fund.

  It is also important to spread your money into all asset classes (as introduced in a previous article these are cash, bonds stocks and property and may also include non-correlated alternative investment strategies) with different levels of risk. For example an individual who has all their capital invested in a single sector or stock would lose more than in a managed fund where the fund manager perhaps could switch into a lower risk asset.

  For those of you who are already invested in a private pension or regular savings scheme, of course you will benefit from current low valuations, as the price you are paying is almost certain to rise over the long term. Indeed, if you haven't already done so,this strategy of 'dollar cost averaging' makes now a good time to start

• Set up your own guaranteed fund

  So how about my recommendations in the present market conditions?

  Of course these will depend on your personal circumstances, but let us assume you have $100,000 to invest for your retirement. I would recommend a mixture of With Profit Bonds, which have always produced returns in excess of bank interest rates and a well managed mutual fund. The majority of your capital should be placed into the capital guaranteed bond and a smaller amount into the equity fund rather than individual shares to reduce the risk. You may wish to consider investing a monthly payment into the mutual fund to take advantage of dollar cost averaging, thus reducing risk still further.

  If you invest $80,000 into a With Profit bond, the return only has to be 4.6% and you would still get more than $100,000 after five years. (These funds have produced a return in excess of 10% over the last five years.) This means that in the highly unlikely event you lost all the remaining $20,000 in the equity fund, you would still have more than your initial capital at the end of the period.

  Thus, you have set up your own guaranteed fund and although I would suggest you stay in the bond for five years to avoid additional charges, you still have access to your equity fund investment whenever you wish without penalties. So it is better than a Guaranteed fund that can be bought in the market.

Ivan Doherty
ipd@ifg-asia.com

Ivan Dohety MLIA (dip) is Chief Operating Officer of IFG Asia. Part of The IFG Group PLC and registered with the Ministry of Finance in Japan to give investment advice.

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