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Thomas Miller Investment’s 10 tips for investors when markets plummet

05 September 2015

Equity markets have been in freefall for most of the last few months, so Thomas Miller Investment’s Frazer Wilson provides his top 10 tips for investors when markets plunge.

By Alex Paget,

News Editor, FE Trustnet

Not panicking, remaining diversified and focusing on the long term are among the main aspects for investors to remember when equity markets are in freefall, according to Frazer Wilson, senior consultant at Thomas Miller Investment.

Following very strong gains from equities since the global financial crisis on the back of improving economic data, low valuations and bucket loads of extraordinary central bank polices like ultra-low interest rates and quantitative easing, investors have generally had a very unpleasant time of it so far in 2015.

The likes of China’s plummeting equity market, huge falls in commodity prices, a spike in government bond yields and the Greek debt negotiations have meant global stock markets have been on a downward trend since April.

Those falls where exacerbated, however, by the events of last week’s ‘Black Monday’ when the devaluation of the Chinese yuan and worse than expected data out of the world’s second largest economy caused one of the poorest days for markets since the last crisis.

According to FE Analytics, the MSCI AC World index is now down some 13 per cent since its peak in April and was down close to 20 per cent last week.

Performance of index during the recent correction

 

Source: FE Analytics

What’s worse, many expect this volatility to continue as fears of a ‘hard landing’ in the Chinese economy still persist, the threat of deflation has only increased over recent months and there is still talk of a US interest rate rise before the year is out.

Of course, markets should be a long-term game and history has shown that many an investor has fallen foul of making hasty decisions on the back of short-term news flow. Therefore, to make sure private investors don’t fall into a similar trap, Wilson highlights his top 10 tips for a plummeting market.



Firstly, don’t panic

First and foremost, Wilson says investors need to keep a level head.

“When markets fall, they often do so quickly and recover slowly. Market crashes will always make the news, however the recovery doesn’t quite seem to make the front pages of the newspaper. Take stock and do not make any rash decisions.”

History has shown that while equities can have very sharp short-term losses, they tend to deliver decent gains over the longer term.

One of the best examples of that dynamic was in September 2008 when the collapse of Lehman Brothers sparked the greatest financial crisis in over a century and caused many to think capitalism itself was about to end.


 

While the UK market fell by 4 per cent that day and even went on to lose a further 31 per cent over the following six months or so, the FTSE All Share is now up more than 64 per cent since the start of the crisis.

Performance of funds versus index since September 2008

 

Source: FE Analytics

On top of that, certain active UK funds (thanks to their weightings to higher risk mid and small-caps) have gone on to make gains of around 300 per cent over that time – such as Fidelity UK Smaller Companies, Unicorn UK Income and Marlborough UK Micro Cap Growth.

 

Review your time horizon

Another important tip, according to Wilson, is that investors know exactly how long they are planning to keep their money in the market. He points out that unless they are investing for at least five years, equities are probably best avoided.

“If you need to access assets in the short term (usually within five years), then be careful about using anything other than cash, even if rates are low.”

Instead of holding cash though, investors may want to own very cautious absolute return funds. A good example has been Insight Absolute Insight, which has returned 40 per cent since its launch in February 2007.

Its maximum drawdown, which measures the most an investor would have lost if they had bought and sold at the worst possible times, over that time though has been just 3 per cent.


Remember the basics

Wilson says investors need to know that the prices of any assets are dependent on the demand for them.

The old adage is that the biggest risk to an investment is the price you pay for it, and therefore the consultant says investors can protect themselves by avoiding areas of the market that have already performed phenomenally well and are therefore richly valued.

“If you invest into anything (stocks and shares, property, antiques, cars, etc) the value will fluctuate. There are no guarantees in this game but let’s take what we do know which is that we should buy when assets are cheap and sell when they are high. However, most people tend to do the opposite.”

 


Balance is key

Diversification is key to the success of any long-term portfolio and Wilson says this is particularly the case when mainstream assets, such as equities, start to plunge.

“As the old saying tells us, don’t put all your eggs in one basket. A diversified portfolio will stand you in good stead,” he said.


 

Investors can obviously build their own diversified portfolio by allocating to various equity, bond, property, commodity and ‘alternative’ funds. However, for those who don’t have the time, information or general know-how to do so, there are plenty of multi-asset funds which can act as a ‘one stop shop’.

One of the best performers over recent years in that space has been the five crown-rated Premier Multi Asset Distribution fund.

Performance of fund versus sector over 5yrs

 

Source: FE Analytics

Our data shows the fund, which invests in other funds, holds 42.9 per cent in equities, 30 per cent in fixed income, 19 per cent in property, 4 per cent in ‘alternatives’ and 4 per cent in cash.



If something seems too good to be true, it probably is.

Wilson also says investors shouldn’t buy into any areas of the investable universe without researching it properly.

“We are all now exposed to ‘investment opportunities’. Our advice is to be very careful, especially when they look too good to be true.”



Review your holdings regularly

Given the options now available to retail investors (there are some 3,500 funds to choose from the Investment Association’s universe), Wilson says investors shouldn’t just stick their savings with one group and ignore it.

Instead, now that the fund industry is becoming ever more transparent, he says they should check their holdings at regular intervals to see whether they are getting the best deal possible and whether their funds are performing as they would expect.

“Plenty of organisations offer a ‘special’ offer either for a small sum, or for a short period of time. Once people deposit their funds (either in cash or investments) they often then leave things where they are. Don’t do this – review the position regularly.”




What’s your plan?

Another very important point, according to Wilson, is that investors have a clear idea of what they want their savings for – instead of just taking a punt on a seemingly ‘attractive’ investment opportunity.

“Ask yourself the following questions: How much can you afford to invest and over what period?”

“Are your assets structured in an appropriate way considering your tax position? When was the last time you reviewed your will? Can you afford to gift assets to your family? Are the new flexible pension rules suitable for you? Could you afford the potential costs of care?”

“The answers will be specific to you and will depend on your future plans, objectives, other assets etc. Remember that we are all likely to live longer in the future, so make sure you have a plan.”



Past performance is no guide to the future

It goes without saying, of course, that the past is no guide to future returns as markets are ever changing entities.

Wilson said: “The world is changing so we all need to be aware that investments that have previously performed well may not be the best place to invest at present.”

While investors can use certain past scenarios to assess how a manager’s strategy might perform in a flat, falling or rising market, investors should never buy into a fund just because it has already made its current investors a lot of money.

One of the best examples of this was with gold funds, which delivered meteoric gains in the first 10 years of this century. This effectively turned out to be a bubble, as the gold price plummeted in 2011 from its highs of $1,900.

Performance of gold funds since 2011

 

Source: FE Analytics

Certain gold equity funds delivered returns of more than 1,000 per cent between 2000 and 2011 and saw huge inflows as a result. However, since then, the average gold fund is down some 80 per cent.



Attitude to risk / Capacity for loss?

Given that example of plummeting gold funds, Wilson says that investors should only put money into the market that they can afford to lose.

“Not all investments have the same level of risk,” he said.

“Keeping funds in cash for a long term also holds its own risks, especially when taking into account inflation over the medium to long term. What would be the position if investments don’t perform as well as expected? Will this impact your future plans. Do you need to take any risk to achieve your goals?”




Be careful what you read

Finally, Wilson says investors need to be open-minded when it comes to the financial press.

“Often literature is very generic and can not take into account each individual’s personal circumstances. Remember everyone’s position is different,” Wilson added.

Therefore, it may be prudent to take certain articles with a pinch of salt. Not any written by FE Trustnet, though, of course… 

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.