The benefit of hindsight

What is the most useful tool a successful investor could have? Strong research? Access to company management? A prodigious memory? These are all useful – perhaps even vital – attributes. However, the most useful tool is the one thing nobody can have: the benefit of hindsight.

As long experience shows us, different asset classes and industry sectors will provide strong or weak performance at different times. For example, equities are widely acknowledged to have provided the best long-term performance of the four main asset classes - but most investors who lived through the meltdown of the "dot-com" sector know only too well that, in the short term, things can be quite different. Bonds on the other hand, are viewed as medium to lower-risk investments, particularly when economic growth is on the wane - but the recent credit crunch left many with burnt fingers. Meanwhile, in times of uncertainty, investors make tracks for the safe haven of cash – but leave your money there too long and the value can fall prey to the corrosive effects of inflation.

The theory runs like this: during periods of strong economic growth, equities are likely to perform well, whereas when economic growth is in decline, bonds and cash should prove more beneficial. "Specialist" asset classes – such as commodities and property – are also available and can perform differently from all of the above. However, do note - these need expert advice and should be approached with a degree of caution.

What can be tempting for investors is to chase the best returns by jumping from one asset class to the next when the returns look promising. However, in reality this rarely works. If judging the right time to switch and where to switch to were easy, we would all be rich. Even some of the full-time, so-called professionals consistently get these decisions wrong. Therefore, instead of trying to choose which asset class to be in and when, perhaps it would be better to have a bit in all the asset classes, all of the time.

This is called diversification – the act of spreading your investment across more than one asset class. In doing so, you not only make sure you are invested in the asset class that is performing best, you also ensure you are not 100% invested in the asset class that is doing worst. Instead you get a bit of everything – and as a result, your investment returns should be smoothed out as performance rotates through the asset classes and each compensates for another as time goes by.

If you feel an appointment with a Four Corners Adviser would benefit you, please call on 0115 982 2996 or email enquiries@fourcornersifa.co.uk

Four Corners Adviser: Robert Elmes

Robert Elmes joined Four Corners, Nottingham IFA as an Adviser in September 2007

Robert’s qualifications include a BA (Hons) Degree in Business and Tourism along with an Investment Administration Qualification (IAQ), Certificate in Mortgage Advice & Practice (CeMAP) and Certificate in Financial Planning (CFP) 1,2,3,4 & 5.

We always welcome feedback from our clients and these are just a selection of comments we have received regarding the service Robert has provided.

"Really good in all areas. Found really good products for my situation"

"Robert was particularly helpful and whenever I had a query, he contacted me promptly"

"Excellent service which helped smooth over a few issues along the way"

"We were very happy with the advice given and felt that every effort was made to keep us informed as to the progress of our re-mortgage. Communication was very good"

"It has been very reassuring to be given clear advice and to have been kept fully informed by letter and phone, even on minor details. Many thanks for your professional and clear advice."

If you think you might benefit from speaking to Robert please click here to send an enquiry or call on 0115 982 2996. We will come out to see you in your own home or place of work, at a time to suit you.

Interest Rate Cut - 9th October 2008

The Bank of England’s Monetary Policy Committee (MPC) voted to keep rates on hold at 5% for the fifth month running at its September meeting. The decision was widely expected as, despite ongoing pressures in the housing and financial sectors, inflation had become a serious issue. Interest rates had been held because inflation was ahead of target. Now, inflation has hit 4.7% and previous MPC minutes indicated they had switched emphasis from supporting economic growth to damping down these inflationary effects. In the last month, however, things have changed considerably. The housing market was already faltering, and the credit markets remain tight. UK Government measures to help had generally been met with apathy. UK GDP has now officially hit zero and some fear we are already into a recession. The final straw, however, was the financial sector. Lehman Brothers sought bankruptcy protection and AIG was bailed out by the US Federal Reserve. In the UK Lloyds TSB has agreed a rescue takeover of HBOS and the oil price has fallen back. Now, Bradford & Bingley has been nationalised as confidence in its future crashed. All in all, the outlook for the economy was looking bleak. The Bank of England, in common with the US and European central banks, decided to move. Their unexpected 0.5% cut brings rates down to 4.5%.

Future of Interest Rates

Interest rates have now been on hold for five months and many feared the next move would be upwards. However, that was before the events of this week changed the complexion somewhat.
The Consumer Price Index is now 4.7% - more than double the Bank of England’s 2% target. UK GDP is zero (and may now, in reality, be negative), the oil price has fallen back and the housing market has completely stalled. Couple this with investment bank failures, the nationalisation of a US insurance company and now the merger between HBOS and Lloyds and the outlook is looking bleak.
A interest rate cut is perhaps back on the agenda; such a cut would be welcomed by both consumers and business and if it materialises would hopefully give a little relief from the current economic woes being experienced by all.

Bank holds interest rates at 5%

The Bank of England's monetary policy committee (MPC) has voted to maintain interest rates at 5% for the fifth consecutive month as it attempted to steer a course between the twin dangers of soaring inflation and faltering economic growth.
With the UK's economic output grinding to a halt in the second quarter of the year and house prices continuing to fall, Mervyn King's nine strong committee would have been under severe pressure to deliver the right decision.
CPI inflation hit 4.4% in the year to July, and King warned it could breach the 5% level by the end of the year, well above the 2% target set by the Treasury.
Charles Stanley chief economist Edward Menashy commented: 'The no change decision was made despite the latest OECD forecast that indicated that UK GDP growth would be 1.2% lower than the 1.8% growth estimate that the organisation had made three months ago.'
Newton's global strategist Peter Hensman said the rate hold was no surprise, but noted that interest rate rises had led one member of the MPC to vote for a rate hike last time round.
He said: 'One [MPC] member, Professor Tim Besley, specifically voted for a rate increase to reduce the threat that inflation expectations drift higher, a fear that has increased with the recent sell-off in sterling.
However, the evidence of a weakening growth environment is sufficient in the near-term to keep policy unchanged.'

Bank holds interest rates

The Bank of England's Monetary Policy Committee has voted to hold interest rates at 5%.
The doves on the committee led by David Blanchflower appear to have failed to persuade the group that growth is weakening at a sufficient rate to warrant a cut despite mounting inflationary pressures.
It is the fourth consecutive month that the Bank has held rates steady, following a rate cutting period ending in April.
As in previous months the news will come as a disappointment to businesses and homeowners alike who would have hoped for a cut in interest rates to offset other rising costs.

Bank Rates hold at 5%

Rather than offer relief to the housing sector and the consumer the Bank of England has chosen to address its concerns over inflation by leaving interest rates on hold at 5%.

Although the news was expected it will still be seen as a disappointment by those looking for a reduction and it is far from certain that rates will be cut later in the year as the bank looks to stave off inflationary pressures.

Whilst increasing the possibility of inflation rising at a time when fuel and food bills are also increasing, an interest rate cut would certainly help many who have seen their mortgage costs rise significantly in recent months. At a time when the range of mortgage products and their competitiveness is reducing, a cut in interest rates would be welcome news for many. However, it looks as though there may be a wait of some months for this.