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Rediscover your belief

My portfolio has lost 30 per cent in the last 12 months. I am concerned that the market still has further to fall and would like to switch some of my funds into cash to enable me to sleep at night. What do you think I should do?

I totally understand your fear because when people experience dramatic falls in value as we have had over the last two years, it is natural to wonder if this time things have changed. Is this time different, is capitalism dead, does a buy-and-hold strategy still make sense?

My advice to you is stay strong, nothing has changed, what we have experienced recently is hard but it is just how markets work. Is capitalism dead, will inflation and interest rates rise in response to government spending, will there be another Great Depression? The truth is that nobody knows but even if we did know, could we change our approach? The people who predict financial disaster do not come with any alternative solutions for investors. The fundamental principles of modern finance still give us the best option, even if the worst comes to pass.

Whether you believe that the current mess was caused by the Government or whether you think it was caused by free-market greed is irrelevant, what matters now is that you recommit to a belief in the power of markets.

In recent months, investment seems to have been put on hold. Bank failures, forced selling and changing Government policy have sent investors into hiding, waiting for better times.

Through the resulting turmoil, cash has been a refuge but this will not continue. The quantitative easing strategy followed by the Government – funding excessive Government spending by borrowing and printing money – is very likely to cause a surge in inflation in the years ahead. In the event of this, the real loss of value in a deposit account is no different from a price drop in an equity portfolio—to say nothing of the opportunity cost to investors of missing big rallies.

When all is said and done, clients hire an adviser to invest their money, not to keep their money in a bank account. Amid volatility, trying to time a market re-entry is even more risky and counterproductive than usual.

How many investors stockpiling cash realise that the FTSE 100 rose by 8.1 per cent during April? This was its biggest monthly rise since April 2003. Daily price movements are like white noise that not only make timing treacherous but confuse our ability to perceive whether we are in an up market or a down market—even while we’re in it.

We cannot predict the start of a new bull market just from one month’s return. That would be foolish, which is exactly the point. If you cannot tell which part of the cycle you’re already in, how can you predict future cycles, or time a turn-round to the day? The real job of the long-term investor is not to predict bull and bear markets but to be invested throughout.

Capital is the fuel that powers our economy. Money must flow to its most efficient uses. Even the money you deposit in the bank does not lay fallow. The banks (and other entities downstream) invest it to generate profit or themselves. In this way, big reserves are utilised to generate further wealth creation.

As a general rule, risk-taking is compensated. If you think equity returns are low at the moment, then it logically follows that shares are less risky now than they were before all this turmoil started, so now is precisely the time to be invested.

Patrick Murphy, FIFP, FPFS, Bluefin


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