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Look to the long term

I have an investment portfolio of mainly equity-based unit trusts, Peps and Isas. Given the recent stockmarket crash, should I keep these funds?

The answer depends as much on the kind of person you are as much as it does on the facts. Run this little test:

Are you generally pessimistic?

Are you very risk averse by nature?

Are you more concerned about not losing any more money on your investments than making money from today?

Have you been checking the unit prices of your investments more frequently than monthly?

Are you going to need the cash proceeds within the next year?

If you have answered yes to any of these questions, then equity-based investments may no longer be right for you.

There is no doubt that the level of stockmarket volatility in recent years is significantly higher than in the past. It is no longer headline news when the FTSE100 or the Dow rises or falls by 50 to 100 points.

In fact, it is now not at all uncommon for these markets to rise and fall (or vice versa) by such amounts on consecutive days. Stockmarket investing through collective investments such as unit trusts, Peps and Isas should be considered as a long-term commitment.

If you invest in them short-term, you are playing with fire. If you are keeping a daily check on unit prices, you have probably had too many sleepless nights recently.

However, if your intention was to hold these investments long-term – and you can put things in perspective – then you may be able to sleep a little more easily without making significant changes to your portfolio.

We should therefore try to put the recent stockmarket events into an historical context. The terrorist attack on the September 11 caused a suspension of trading on the New York Stock Exchange. When it reopened on September 17 we saw a 7 per cent fall in the DowJones Industrial Average.

To put the fall of the Dow into context – it fell by 22 per cent in the stockmarket crash of October 19, 1987. However, we have been in a two-year bear market which has seen stockmarkets in the UK and the US fall by around 35 per cent from their peak.

Serious stuff – so if you are really thinking about getting out of your equity-based investments, you may have left it a little too late.

I guess that you are really asking the big question – where will markets go from here? As Greenspan said soon after the attacks on the US: “Nobody has the capacity to fathom fully how the tragedy of September 11 will play out.”

Several weeks have passed since then but, in my view, Greenspan&#39s words still ring true. If you look back over the last 20 years, it has been external factors that have upset the market more than any cyclical economic change. So let me offer you a long view.

Prior to the attack, US economic activity indicators were weakening and warning of a possible recession – ringing alarm bells across the world&#39s economies and stockmarkets. The events of the September 11 simply made things worse.

However, it is important to recognise the strenuous efforts that have been made during this calendar year by central bankers to avoid a deep and lasting recession by cutting interest rates to stimulate the world economy and consumer spending. The determination of the US Federal Reserve in this respect should not be underestimated.

It is not widely recognised that during 2001 US interest rates have been cut by the US Federal Reserve nine times, reducing the rate from 6.5 per cent to 2.5 per cent. The UK has followed a similar pattern – cutting rates five times from 7 per cent to 4.5 per cent.

Interest rates in continental Europe have also fallen, in a rather different pattern, from 4.75 per cent to 3.75 per cent. The percentage reductions are astounding – and the pace breathtaking and historic.

Several of these interest rate cuts had taken place prior to September 11. Without the events of that day, we would probably now have been starting to see turning points in the US economy.

These will now be delayed – but maybe not for too long. President Bush is likely to gain approval for a tax and spending package in excess of $100bn which, coupled with the interest rate cuts of 2001, is likely to push the US economy back into growth in the first half of 2002. Stockmarkets will recognise this and reflect the improving, more positive climate.

Best advice to you is to try to remain calm through the current uncertainty and volatility. The darkest hours are just before dawn.

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