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
150 Recession starts
135 Recession ends
after 14 months
The stock market usually falls before the economy falls
and hits bottom nine months after recession starts
-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