What you need To Know To Invest Report
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  • 1. RES-5350-U JUL 2009 Page 1 of 2 U K S t r a t e g y r e p o r t What yoU Need to KNoW to INveSt Many investors think they need to rely on predictions to guide their investment choices. However, the wide range of conflicting predictions today is confusing, the stock market has been bouncy, and as a result many investors are hesitating rather than adding attractively priced equity investments. We don’t think you need short-term predictions. Instead, a better approach is to set long-term goals, build a diversified portfolio with an appropriate mix of assets and rebalance it regularly. One implication of this systematic approach is that the sharp decline in stock prices over the past year means most long-term investors can add equities at lower prices to return their portfolios to their recommended investment mix. Predictions Often Change Add Equities as You Watch for Green Shoots You may hesitate to invest today if you believe you need Since early April, there have been many reports of expert predictions about the economy and short-term slightly better economic news, which have been investment performance as a basis for your choices. The characterised as ‘green shoots’. Whilst better economic range of current predictions is wide and varying. However, news is always welcome, these early positive signs merely there are larger concerns about basing your investments suggest the UK economy is declining at a slower rate, not on short-term predictions. Predictions may make you feel that it has returned to positive growth. However, there is more confident about your decisions, and in a few cases increasing evidence that the worst parts of the downturn could even result in an appropriate portfolio. Unfortunately, may have passed. when the predictions change, you must adjust your portfolio For the stock market, the result has been wide swings in accordingly, which can be costly. Even more disappointing, share prices, as investors tend to overreact to both good the results are often poor. The reasons include frequent and bad news. Experts disagree about the timing and trading, incorrect predictions, and portfolios that are strength of the recovery, with many predictions that inappropriate for the investor’s goals and situation. the ‘green shoots’ are withering (or worse). Instead of Instead of trying to use predictions to make your investment evaluating the conflicting predictions about when we’ll decisions, we think a better approach is to build a portfolio see an economic recovery in the UK or elsewhere, we think that is adequately prepared for most market environments. this uncertain environment provides an opportunity to add With our approach, you’ll be able to invest appropriately equities at attractive prices. We think investors shouldn’t without needing to know the strength of the economic wait for better economic news, as historically the stock recovery, the path of future oil prices, currencies or market has rebounded in advance of the economy’s housing prices. Working with your Edward Jones financial emergence from recession, as shown in the chart below. adviser, you can tailor your investments to your specific The average return for the FTSE All-Share over the year situation and the financial goals you wish to achieve. In after a recession ended was 21.0%. addition, you’ll generally find you don’t need to make many changes over time. FTSE All-Share Activity Around Recession 155 150 Recession starts 145 140 135 Recession ends after 14 months 130 125 120 115 110 105 100 The stock market usually falls before the economy falls 95 and hits bottom nine months after recession starts 90 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 Months Before Months After Recession Starts Source: Bloomberg data with Edward Jones calculations
  • 2. RES-5350-U JUL 2009 Page 2 of 2 Despite the rise in share prices since early March, we find Reduce the Impact of Low Short-term Interest Rates quality shares are not priced in anticipation of recovery, The current economic environment has led many to save due to the great divergence in predictions and the more and spend less. However, you may be keeping your uncertainty about the outlook. In the past, as more additional savings in a short-term account paying a low companies reported earnings above expectations and interest rate. The Bank of England (BOE) lowered short- when more economic signs improved, share prices rose to term interest rates to a record 0.5% in March 2009 and reflect the improved outlook. We think this is an opportunity plans to keep them low to combat the recession. If you to add equities. have placed more than you need in short-term cash investments, consider adding long-term investments that Short-term Market Bounces Conceal Positive Trends pay higher rates and are more closely aligned with your Equities have historically provided investors with some long-term investment goals. These can increase your of the highest long-term investment returns, but they income today as well as helping to increase the income generally experienced large losses over the past year. you expect to receive in the future. Global stock markets have rebounded sharply since early How to Prepare Your Portfolio March. However, many investors have focused on the Historically, asset allocation has determined more than volatility, heard conflicting forecasts and, as a result, not 90% of a well-diversified portfolio’s return. If it’s not well noticed the positive trend. diversified, the impact of individual security selection We expect global economic news will remain a mix of increases, and most studies have shown that poorly positive and negative for some time, which is typical diversified portfolios underperformed well-diversified during the late part of recessions, and we expect share portfolios. As a result, if you’re reducing the diversification prices to continue to rise and fall sharply in response, of your portfolio by using predictions about the current which means the recent market bounces are likely to environment, your returns will depend on the accuracy of continue. Eventually, however, when the economy regains those predictions but are also likely to be lower than the its footing, the positive indicators should outweigh the simpler approach of staying well diversified. Our approach negative, as has happened during past recoveries. is to prepare your portfolio for most environments by Investors need confidence to look beyond these short- owning an appropriate mix of quality assets and regularly term bounces and add equities. monitoring your diversification over time. Specify Your Financial Goals If you hold investments in many different accounts, it may If you’re uncertain about whether you need to add equities, be difficult to view your overall situation clearly. Ask your you may not have a clear picture of your financial goals. financial adviser to provide you with a review of your When you don’t know where you’re trying to go, you’re combined investments. There may be changes you need unlikely to reach your destination. Ask your financial to make to improve your chances of attaining your adviser for a portfolio review to evaluate your current financial goals. situation and identify changes you may need to make to put your portfolio on track towards your financial goals. These are far more important in directing your current Past performance is not an indication of future results. investment decisions than predictions about the short- Edward Jones Limited is authorised and regulated by the Financial Services Authority term environment you’ll face, in our view. Knowledge of and is a member of the London Stock Exchange. Registered in England and Wales No. 3403976. 11 Westferry Circus, Canary Wharf, London, E14 4HH. © 2009. your goals frequently helps you avoid mistakes that can result from short-term thinking. As part of the process, assess how comfortable you are with sharp declines in the value of your investments, such as you undoubtedly experienced over the past year. The recent bear market was worse than average but not unusual. Long-term investors need to prepare to invest through similar downturns in the future. Adding equities during stock market declines to rebalance your portfolio to its target percentage in equities can be one of the best steps to take towards achieving your long-term financial goals. Kate Warne, ph.d., CFa Market Strategist www.edwardjones.com