For every investor, the events of the past few weeks have been at the very least, bewildering, but for many, of serious concern. The media constantly appear to delight in telling us that the markets have done nothing but move backwards for days wiping £millions off the value of shares. It’s easy to get caught up in the media hysteria but sometimes it’s necessary to step back and look at the bigger picture. 

The current credit crisis started back in 2007 with the root of the problem being related to ‘subprime’ US mortgages. Financial markets lost confidence and the ensuing credit crisis commenced.   Financial institutions had been reckless with their lending and bad debt had been packaged and resold, repackaged and resold again. Governments across the world were forced to step in but this just moved the bad debt onto their balance sheets leaving a number of governments sovereign debt at the forefront of investors’ minds.

The crisis has taken a long time to unfold so it’s expected that it will be a while for the world to recover. Some people have borrowed too much for too long and as a result now need to reduce their debt, which for some may take some time. Both households and governments are now finding they have to tighten their belts and this has just started to kick in. As a result the economic recovery is likely to be slow but a reality we all need to face up to. The National Institute of Economic and Social Research recently reduced it’s growth forecast for 2011 to 1.3%, and forecasts just 2% growth next year. The Office for Budget Responsibility is slightly more optimistic, predicting growth of 1.7% this year and 2.5% next year.

The outlook for business however is rather different as many companies took early measures to reduce their debt, building up cash reserves to put them in a good position. 

Unless we return to severe recession the stock market looks good value, particularly after recent events. Fear is ruling the markets at the moment allowing good companies to be priced down with the bad.

So what does this mean for investors?

Well it’s almost certain that the volatility we are currently seeing will last for quite some time. Most investors should focus on the long term, meaning at least five years, ideally ten. 

Depending on what stage of your investment life you are at will no doubt have an impact on your attitude to risk. If you are close to retirement or retired you will understandably be concerned but for those with some time to go before they need to access their capital, the current climate could provide an opportunity. History shows us that some of the biggest market falls and rises tend to follow each other. Those investors who choose to exit the markets now may take a hit on their investments and risk losing out when the markets rally.

What action can investors take?

Some investors panicked back in 2008 and sold their investments at exactly the wrong time. If you are in a position to accept fluctuations then you should probably ride out the storm, although the markets could drop further.

In many cases share prices are 10-20% cheaper so it’s possible to view the current situation as a buying opportunity. One of the world’s most successful investor’s, Warren Buffet, advises us to “be fearful when others are greedy, and greedy when others are fearful”. Fear is certainly ruling at the moment.

Regardless of your position, if you have any questions about any of the issues raised here, you can contact us for a chat. We provide a full investment and pensions review service and can help you consider the details of your own situation within the context of both your future objectives and the events of the past few weeks. 

Nick Thomas

Managing Director - Thomas Heald Ltd.

 *The value of your shares can go down as well as up and you may not get back the full amount invested.