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Independent View

“Invest when blood is running in the streets” is the famous quote of Nathan Rothschild. Quite literally during a war, when it is often the best time to invest because prices fall to such low levels when everyone is panicking that bargains can be picked up.

We are not at that stage yet but, without doubt, the events of September 11 did precipitate the current very poor stockmarket conditions following a bear market which had been going on for 20 months or so.

Experts have been arguing that, among other things, it is due to reduced corporate profits, low inflation, low interest rates, lack of spending, risk of deflation, projected population decline, etc.

To me it seems that the principal reason is that stockmarkets, particularly in the UK and US, have been overvalued for much of the last two decades when measured on traditional yardsticks such as the price/earnings ratio of the market.

What we are now seeing is a return to more realistic values for shares and this is largely the reason for the con- tinued fall in share prices.

Of course, confidence plays a large part in all this and the confidence of the market appears to be very low.

At the time of writing, the FTSE 100 index stands at just over 4,600 points, having reached 7,000 in December 1999. This is a fall of almost 35 per cent

As the market this year is already down by around 12 per cent, it looks likely that this will be the third consecutive year that the UK stockmarket will have fallen. This has not happened since the late 1940s.

How long can the current bear market last? Well, how long is a piece of string? Certainly bear markets in history have lasted as long as 15 years. Japan has been going through a bear market now for the last 13 years.

The great sage of Omaha, Warren Buffett, now the richest man in the world, predicted a year or so ago that the current bear market could last for eight years.

So where should you invest your clients&#39 money if you believe this bear market could last for a few more years yet?

Well, assuming stockmarket returns will be relatively modest over the next five to 10 years at, say, 5 per cent a year is it worth the risk of having much, if any, money invested in equities? The problem is, where else can you invest the money to beat this type of return?

For illustration, we have been investing our clients&#39 money over the last two to three years in secondhand endowment trusts, preference shares, undated bonds, permanent interest-bearing shares, undated gilts, certain low-risk zeros, with-profits bonds, property bonds and distribution bonds.

Many of these investments are of the type that will perform well in a period of falling interest rates and inflation and falling stockmarkets. Moreover, the last three investment types give a much wider spread of asset types such as cash, fixed interest, property and equities.

This last point about asset class diversification is one that I feel very strongly about.

Unfortunately, it has become trendy during the last 20 years for fund managers and stockbrokers to invest primarily in equities, especially FTSE 100 index companies, fashionable sectors such as Japan, Far East, emerging markets, TMT and zeros.

The investment perform-ance of most of these professionals has been quite poor but only really exposed during the last two and a half years.

Anyone can make money during a rising stockmarket but only the truly skilful fund managers do well during a static or falling market.

I believe one reason is because there are too many young fund managers who,up until 1999, had largely only ever seen stockmarkets rise for practically all of the 1980s and1990s and had not ever experienced a deep bear market before.

It is also because the fund managers follow each other like sheep. How many times have you looked at the top 10 holdings in a collective investment scheme and found the same old names such as BT, Cable & Wireless, Vodafone and Marconi? And what has happened to these shares in the last two and a half years? They have been hammered of course. There are exceptions that do well but they are far too few of them.

My view is you need to keep invested in equities but a greater proportion of money should be invested in alternatives for at least the next five years if you hope to achieve returns of perhaps 6-8 per cent a year in a low-inflation/low interest rates era. And if we see a major terrorist attack and stockmarkets plunge significantly again, that will probably signal the time to invest heavily into equities. Just remember Nathan Rothschild&#39s saying.

Tony Byrne is business development director at Byrne Williams

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