Three options for investors to ride out FTSE turmoil

17th October 2014

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With the stockmarket in turmoil, investors are being forced to make some tough decisions: what should you do with your investments?

Yesterday, the FTSE 100 entered a technical correction falling more than 10% from its recent high of 6,878 – reached last month – to bottom out at 6,072 before rallying to close at 6,195. This morning it continued on its rally, opening 1% higher at 6,261.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said investors shouldn’t be too worried by the fluctuations, pointing out it is not the first time the market has moved substantially in recent history.

‘In February the FTSE fell 6% on concerns over the health of emerging markets. Last May the market fell 12% when the US Federal Reserve announced the tapering of quantitative easing, and in July 2011 fears over the US debt ceiling caused a 17% fall,’ he said.

‘The current bout of turbulence may have further to run, but long-term investors should try to shut out the noise.’

A bear market?

Khalaf said that ‘while all bear markets start with a correction, not all corrections end in a bear market’.

‘No-one can predict when the current market turmoil will end, or where it will eventually leave stock prices. But although markets are certainly dwelling on the negative right now, there are positives around you if you care to look for them,’ he said.

‘Plunges in the stock market like we have seen in the last month can prompt an emotional knee-jerk reaction. But long term investors should not let market turbulence rattle them into selling their investments prematurely. Indeed, those who are brave enough to buy when others are selling often stand to make handsome rewards when the dust has settled.’

Three options for investors:

 

Sell: while this may be the instinctive reaction when markets fall, Khalaf warned that ‘if you do this every time the market takes a tumble, you are likely to find yourself gradually depleting your nest egg, as you sell low and buy high when the financial news gets more upbeat’.

 

By selling, investors have to make two decisions; when to sell and when to buy back in, both of which are a coin toss and the ‘odds are against you consistently getting both right’.

 

Sit tight: the saying ‘don’t just do something, sit there’ should be a mantra for long-term investors. While investors should review their investments on a regular basis, changes should only be made after all the facts have been considered, not just as a reaction to market falls.

 

Buy: legendary investor Warren Buffett has always encouraged investors to be greedy when others are fearful and fearful when others are greedy. Although buying when the markets are down may be going against your instinct the approach makes sense and investors who bought shares when markets were at their lowest, such as 2003 and 2009, have been rewarded.

 

‘In terms of the current market environment, things could get worse before they get better,’ said Khalaf. ‘However, while we have had a string of bad economic data over the last month, investors should pause to consider whether company prospects are fundamentally different to how they were at the beginning of September. The answer is probably not.’

Where to invest?

 

If you are feeling brave, then Khalaf said there are a number of opportunities for investment at this turbulent time. He recommended the Woodford Equity Income fund run by veteran fund manager Neil Woodford. Khalaf said that he has a ‘formidable track record, particularly in a tough economic environment’ and is known for shunning tech stocks and banks before these sectors crashed.

 

Woodford also sold his stake in Tesco in 2012 to Buffett, a purchase the latter has said was a mistake.

 

Investors should also consider Lindsell Train UK Equity fund, as ‘the managers of this fund are long term buy and hold investors of what they consider to be great company’ and ‘they won’t take any notice of market noise’.

 

There is also the option of a tracker fund for those who just want access to the market at a low cost.

 

 

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