Jump ship to shares and you risk missing the boat

INVESTORS have rediscovered their appetite for stocks and shares in recent weeks as stock markets have enjoyed a New Year bounce.

A FTSE rally has done wonders for investor sentiment and money is once again flowing into equity funds, which outsold fixed-income funds in each of the last four months in 2012, according to the Investment Management Association.

How much of that money belongs to investors with independent financial advisers (IFAs) though? Probably not that much, which some may view as a failure on the part of IFAs. However, the opposite is true. If you’re a do-it-yourself investor and don’t take professional advice, the chances are greater that you’ve put more cash into shares and equity funds over recent months. That may reflect your concerns over the bond market, which some experts claim is a bubble primed to burst.

However, it may also be a function of your optimism regarding the market outlook. But it’s not rational – when the money starts shifting on a large scale from cash and bonds to equities, the likelihood is that you’ve already missed the chance to make big gains. In what other area of life do people wait until prices are expensive before they buy and run away when prices are cheap? As investment guru Warren Buffett once said: “Be greedy when others are fearful and fearful when others are greedy.”

That’s why IFAs offer value when markets are rising, not just when things go pear shaped. While jumping in and out of assets and funds according to market conditions can make life more interesting, it can be damaging if you’re investing for the long term.

A decent IFA will keep the focus on the investment horizon. In other words, they’ll have clarified the goals and put the appropriate plans in place. This usually involves creating a cost-effective and diversified portfolio that helps reduce volatility while producing the desired returns over the long run. Lose your nerve when things are rocky or chuck everything into shares when markets are flying and a lot of that good work will be undone. If you’ve worked out a long-term plan with an IFA, they’re unlikely to be ploughing your money into equities right now. They know that while the rally may have some legs in it yet, it’ll end soon enough and leave the latecomers nursing losses.

That’s why good advice is a solid investment. The buoyant start to the year in the markets has boosted confidence, but it also means a correction will come along over the coming months. That’ll be when the panic starts and when financial advisers will be able to demonstrate why it pays to keep your eyes on the prize.

The Scenario: Victor and Jean Fleming

Victor Fleming is a 56-year-old engineer who earns £48,000 a year. He and his wife, Jean, live in West Lothian, where they raised their three children. Jean works as a part-time special needs assistant and earns £12,000 a year.

Their eldest son, Craig, is married and lives with his young family in Midlothian. Their middle daughter, Ellen, works in New Zealand. Victor and Jean’s youngest daughter, Susan, is in her first year of study at the University of Kent. Her parents help with her expenses and course fees, which cost them around £10,000 per annum.

When Jean’s mother died, she left her holiday home in Portugal to Jean. The property was valued at around £395,000. This allowed Victor and Jean to repay their mortgage fully, and to invest the remainder. Victor and Jean have just decided that they want to buy a new property in Kent, for Susan to use during her time at university, after which they intend to rent it out. Today, they saw a suitable property with a price of £100,000 and they plan to get in touch with the property agents tomorrow. Victor and Jean will need the money by the end of April, and it will need to come from their portfolio. How will our IFAs tackle this change in Victor and Jean’s circumstances? Find out in next month’s IFA of the Year report on Sunday 3 March.

The competition Our five competitors must construct an investment portfolio for our fictitious couple, Victor and Jean Fleming. Each IFA will aim to achieve the Flemings’ long-term objectives and reflect their risk profile; and each will have to react appropriately as the Flemings experience the odd life-changing event along the way. The judges (Craig Hendry, director of Johnston Carmichael, and Bill Jamieson, former executive editor of The Scotsman and editor of business website Scot-Bizz) will peruse each IFA’s investments and each contestant must justify their recommendations. Whoever produces the most effective investment report for the Flemings, based on the information in the case study, will be crowned IFA of the Year 2013 in July.