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Has the tide turned on emerging markets?

2 March 2019

9:00 AM

2 March 2019

9:00 AM

Knowing that stock markets have had a turbulent time recently, I looked up my investments online to discover that some funds were actually worth less than I had originally put in.

I can’t say that it caused me a sleepless night. I have been a stockbroker. I understand that share prices go up and down but that in the long term, shares are the best investment. It doesn’t bother me if, temporarily, my investments are in the red.

However, my relaxed attitude is different to many people’s. Data shows that individual investors tend to sell en masse, scared when stock markets go down, as happened at the end of last year. Some people really do wake up in a cold sweat when their funds have fallen.

So what can you do if your investing is keeping you awake? You could always sprinkle a little lavender oil on your pillow. Alternatively, you can stick to investing in bonds — which are government or corporate IOUs. They pay interest — usually at a fixed rate — and are redeemable at their face value at some point in the future. They are not risk-free — when companies go bust they can take their bondholders down with them. Their tradable value, too, can go up and down. But in general they are safer, steadier investments than shares. If a company does go bust, its bondholders will have a place in the queue for a slice of its remaining assets, ahead of shareholders. You are less likely to find your bonds have crashed in value by 20 per cent — a common enough experience for investors in individual shares.


But there is a price to be paid for peace of mind. While a global bond index fund would have earned you a return of around 4 per cent over the past four years, you can expect a long-term return on shares of between 6 and 8 per cent. Over the years  that will impact hugely on your quality of life during retirement.

If you really want to beat the night-time investment terrors, education is the answer. Teach yourself a little about stock markets and you will be able to invest in shares less painfully. The first rule of investment is diversification: don’t put all your eggs in one basket. If you are worrying that your investment in one firm has fallen by 15 per cent, the problem is not that it’s gone down, it’s that you shouldn’t have so much of your wealth in one place.

I invest in a passive fund which owns 6,000-20,000 different companies. I own both winners and losers but overall, over time, the winners outpace the losers. So what if Thomas Cook shares plunged by 70 per cent last year when I know I am also invested in Ocado, whose shares doubled?

My second rule for combatting insomnia is don’t try to get rich quick — be happy to get rich slowly. You will hear numerous share tips claiming that shares of such-and-such a company are going to soar. But there is no such thing as a Sure Thing in the stock market — and if there were, it would probably constitute insider trading, which is illegal.

That brings me to another rule: leave your money invested, don’t try to sell at the top and buy at the bottom. No one can accurately time the market, at least not month after month, year after year. So don’t attempt to predict the state of the Chinese economy or the political upheavals in America and then use your analysis to drive your investments. The result will be lying awake in the small hours worrying about the latest Chinese industrial production figures.

Instead, buy shares in all the major markets, knowing some will go up while others will go down. Even professional fund managers fail to out-perform the market much of the time. So don’t bother doings loads of research. This year’s hot stuff is tomorrow’s flared jeans. Take the easy route: invest passively and leave well alone.

It is easier to be relaxed about falling stock markets if, like me, you are still accumulating a pension. A falling stock market means I can buy shares more cheaply, so I see it as an opportunity. But if I were retired, with the need to live off my capital, I admit I would not be so relaxed if stock markets plunged. From the end of 2007 to the end of 2009, during the opening stages of the financial crisis, the S&P500 index halved. That meant I was able to seize the opportunity of the slump to boost my holdings.

This leads me to my final rule. When you stop earning and start living off your nest egg, it probably is a good idea to switch about half your money into a safer proposition, such as bonds. But even then, the key is diversification, which means buying into a fund that invests in bonds issued by a large number of companies. And by that time you should have learnt not to look up the value of your investments every day.


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