Investors were urged to sit tight and take a long term investment view this week by Fidelity In...
Investors were urged to sit tight and take a long term investment view this week by Fidelity Investments. The advice came in response to the FTSE 100 falling below the 5000 mark for the first time in three years yesterday. Fidelity reasons that some of the strongest rises in equity markets tend to come immediately following a sharp drop in value. On average markets recover 9.8% one month after the trough of a bear market, and increase by 26.2% over 12 months says Fidelity.
Furthermore the fund manager noted that equity market returns tend to be concentrated in a relatively small number of strong trading days. The group cited that missing the best 40 days - just three or four days a year - from the end of 1987 to the end of 2000 would have reduced an investors return to 5.6% from 14.4%. Fidelity believes that it is impossible to predict the markets on a day-to-day basis and that the risk of missing these strong trading days is simply too great for private investors. Therefore investors should resist the temptation to panic sell during this period of volatility.
John Ross, Senior Portfolio Strategist at Fidelity Investment said: "Buying high and selling low is simply a bad investment strategy. We believe that the best strategy for investors is to take the long term view and stay fully invested rather than trying to time the market, however tempting it may be to sell out now and buy back when there is less volatility. Our research indicates that those investors who sit tight are most likely to see their investments recover more quickly than if they tried to time the market. It is a fact that, in the longer term, equity investments outperform cash."
If investors are looking to reduce their risk, suggests Fidelity, one option is to rotate a portion of their portfolio into fixed-income or cash funds. These funds clearly have a lower risk profile than equity funds but a lower potential return. Alternatively investors who have cash at their disposal may wish to consider investing in international markets to diversify their portfolio. Market returns in international markets are not highly correlated, so that when one market gains another may lose, therefore reducing overall losses.
Paul Bruns and Elaine Parkes
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