During the past six months or so, we have seen stockmarkets swing significantly, with the FTSE100 soaring as high as 6,103.7 (3rd May 2011) and falling as low as 4,791 (9th August 2011).
This represents a range of 1,312.7 points, or 21.5% of the high point, during the period. It could lead some investors to wonder what is happening, and whether shares are a good basis for long-term investment.
The point is, of course, that investments should always be seen within the context of a pre-determined time-frame. If you are likely to require access to part of your capital within the space of a few months – or even a few years – then investing in assets that can be highly volatile or which have significant dealing costs is unlikely to make sense. Part of your assets should be kept in an easily accessible format, which usually means cash deposits. This part of your investment portfolio is unlikely to keep pace with inflation, but that is a price many are prepared to pay in order to have peace of mind.
Investing for the long term.
In general, volatility over a short to medium period is not something that should be of great concern; provided you do not need access to your money immediately, there is time for its value to
recover. Of course, the longer you hold investments, the less significant dealing costs associated with purchasing and selling assets become, compared with overall growth.
Assets such as shares (including collective investments like unit trusts) and property should be seen as longer-term investments. What matters is not how much values may fluctuate over the short term, but how they perform over the longer term. Looking at the FTSE100, the index is worth around twice as much (ignoring inflation), as it was twenty years ago; a not unrealistic time-frame for investments.
Low values can help
Over the shorter term, lower values can actually be of assistance to investors. For example, with the FTSE100 standing about one-quarter lower now than it did at the start of 2000, investors today can purchase many more shares for their money than was the case almost twelve years ago. This means that the potential for gain, should share values return to their long-term trend, is far greater simply by virtue of the current “undervaluation”.
Of course there are other factors that need to be taken into account, including dividend growth and the relative strengths of various market sectors, when making investment decisions, but that is the strength of seeking independent financial advice – we are always pleased to offer you our professional and individual support.