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Your Money > Investing Comment Articles > Dodging the bullets
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By Richard Hunter, Hargreaves Lansdown Stockbrokers
"Now is always the most difficult time to invest" - Anonymous It does all rather seem like doom and gloom at the moment. Markets globally are trying to decide on a sustained direction. Worries over the US economy and the general continuing sub-prime and related fallout are causing jitters which have been lingering for some time. This of course has given rise to the usual tide of opposite opinion. Another market adage says that "economists have predicted eight of the last three recessions" and, at present, the bears are receiving airtime, arguing that the current economic uncertainty could have perilous repercussions for global markets as a whole. Then there is the weakness of the US dollar, the possibility of the Chinese market overheating, concerns around inflationary pressures such as oil and food, not to mention the ongoing threat to general stability caused by terrorist activities. What is an investor to make of all this information and, is it time to be running to the hills? Of course economic and general market indicators are vital and, indeed, the current strength or otherwise of the companies in which you are invested is of great importance. There is no question that these factors, in total, provide some factual proof of what has already happened, without necessarily pointing to what might happen in the future. However, turbulent times in the market provide an opportunity for the investor to go back to basics and make sure that their original aims are still aligned with the current environment. Perhaps the most obvious at the current time is attitude to risk. Do investors regard themselves as risk averse? Or perhaps low, medium or high risk? Again, there is no steadfast rule, but in general shares will tend to fall into the medium category, certainly the "blue chips", or well-established companies. The higher risk ones will tend to be those smaller companies who have either yet fully to establish themselves, so-called "fledgling" companies, or perhaps those who operate in a very niche area and therefore do not benefit from the diversification which can be the saviour of their larger counterparts. Even within this category of risk, there are different levels. There are, for example, defensive shares which would suffer in a prolonged market downturn, but potentially less than cyclical stocks. Whichever part of the economic cycle we are in, there will of course still be the need to eat, heat and treat - which is why the likes of food retailers, oil companies and pharmaceutical firms classically fall into this category. In addition, the utility companies, whilst having traditionally being regarded as somewhat dour stocks, often compensate for this by having typically larger dividend yields and, in the last year or so, bid speculation has added further interest to their value as an investment. This leads to what is usually the second largest question an investor must ponder - whether they are interested in capital growth or income. Again, pure capital growth stocks tend to be found towards the smaller end of the spectrum and are typified by companies which, assuming they are in profit, will be reinvesting this extra capital in an effort to grow the business further. The higher yielding stocks, or income shares, on the other hand tend on the whole to be well established, stable and cash generative companies who should not have difficulty in maintaining future dividends. These are, of course, very general summaries of what high/low risk and capital/income shares might look like. There are a whole host of factors which investors need to be taking into account, especially when investing at stock level, such as the likelihood of strength in future earnings and just which factors differentiate that company from its competitors. It is, however, worth pausing for thought as the markets continue to undergo their current state of alert. If the investor is comfortable with their own investment objectives and, indeed , their own timeframes which will usually be significantly longer than just a few months - it may help to put matters into a more personal perspective. Useful links: |
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