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Money Market Roller Coaster: Should I Get On or Off?

Given the recent further turmoil in markets, we thought you may wish to have an update on our view of the markets:

2008 has so far been a year that many people would like to forget. Many have cash deposit worries for their ‘safe money’, the Northern Rock debacle and a few others are now offering rights issues with the mortgage market also in turmoil.  Add to this, the *UK stock market down 10%, *Japan down 7% , *US Dow Jones down 7% and *Property down 4% with commercial property funds down even more.

With sensationalist media preaching doom and gloom, many could be forgiven for looking to the mattress as a save haven for their money.

We believe a reminder of a few basic principles are in still in order:

• Markets go up and down continually
• No market constantly rises and no market constantly falls
• Stock markets and property markets generally outperform cash over a medium and longer term
• Over the last five years, despite the recent falls, UK stock markets are still up over 50% eclipsing cash deposits*.
• Markets move very quickly and huge swings in growth or falls happen in a few days with the remainder of the year being flat - you have to be in it to win it - just be patient
  

Cash is king or is it?

Cash is a safe haven for many: Lenders are falling over themselves and effectively ‘soliciting’ business to receive valuable funds with higher than average interest rates being the bribe. This is great news for the cautious investor if you happy to make modest returns, but beware of inflation eating into those interest rates. If you get a gross interest rate of 7% pa, after basic rate tax deduction this is 5.6%. If inflation is 3.5%, that is just a 2.1% return over inflation. You are getting poorer if you spend it.

* 01/06/07 to 31/05/08: FTSE All Share, Nikkei 225, Dow Jones  , Halifax Property Index (seasonally adjusted)

Is my only option a roller coaster then?

No it is not, but the question is when should you get on or off the roller coaster? We believe the answers are very simple:

• Be rational
• Do not leave a market after you have made losses
• Do not enter a market when headlines say how great the performance is, you are too late
• Buy low, sell high and keep your nerve

So what of the current markets?

• Stock markets have fallen: Buy or sell? You know the real answer.
• Commercial property funds have fallen: Buy or sell? You know don’t you?
• Gold prices have rocketed: Buy or sell? Are you too late? Be logical.
• Soft commodities such as Oil have risen: Buy or sell? You know this answer.
• Inflation protected investments have grown well: Buy or sell? We think you know this too.

IN A RISING MARKET (one that has fallen and is in recovery) - consider investing lump sums. But look out for those that have already had long periods of growth and ‘call to action’ signals on TV with headlines such: "Oil prices hit another record high today", this is the time to get out, sell out or switch away. Do not be greedy!

IN A FALLING MARKET - consider phasing your savings in with regular savings to benefit from pound cost averaging i.e. spreading the risk and buying at a range of prices. Again, look out for ‘call to action’ headlines: "FTSE fell a record 200 points today", this is the time to get into a market. Be greedy!

As Warren Buffet, US investor and billionaire said: “I will tell you how to become rich.  Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”