As the end of the Isa season approaches, advisers should encourage clients not to base their investm...
As the end of the Isa season approaches, advisers should encourage clients not to base their investment decisions entirely on past performance, according to Adrian Shandley, investment partner at Balmoral Associates.
'Advisers should concentrate on what will perform well over the long term rather than what has done well or poorly in the past,' he says. 'Equities have gone through a turbulent time as of late but that does not mean they will not do well again in the future.'
While many investment houses have increased their corporate bond offerings based on the recent strong performance from the asset class, the market as a whole is looking forward to better performance from equities.
John Hatherly, head of global analysis at M&G, says: 'Equity markets have been producing negative returns until the end of last year and the global economy has experienced its most severe bear market since 1973/74.
'Investors are being more cautious based on the past performance of the market, but bear in mind that a year ago, past performance would have led investors to put their money in technology.'
With an expected upturn in the global economy, investors should change their risk perspectives, says Shandley. 'Most investors have turned risk-averse and chosen to invest in a cash rather than a bond or equity Isa,' he says. 'This attitude to risk might mean they miss out on the gains the market is likely to make during its recovery.'
Shandley adds that if someone has lost money in a fund but still believes it to be a valid investment, they might end up making more money by sticking by this view and putting more money in the fund.
'For example, an individual buys 1000 units in a trust at £15 each, paying £15,000,' he says.
'During a downfall, the price of the units falls to £5, making the value of the investment £5,000. If the individual thinks that his initial judgement was right and the fund remains a sound investment, he might want to buy more units. Say he puts another £15,000 in the fund, buying 3,000 more units at £5 each, giving him 4,000 units. If the price of the units then rises to £7.5, he will get his money back.
'If the price of the units rises to the initial price before the fall, £15, the individual makes a £30,000 profit, even though the price of the unit has not risen above the price at which he first bought it.'
Hatherly believes the most vital element of advice after recent turbulent markets lies in understanding the level of risk that a client is willing to take. 'If the client wants to change their position in the market but does not want to stake too much, the best advice would be for them to diversify their investment by putting money into a combined equity and bond Isa,' he says.
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