Ken Taylor: Don’t rush for the exit without properly reviewing investment

Over the past month the FTSE 100 index has moved either up or down by over 1 per cent a day on three days out of every four. The past week alone has seen significant falls, but this has included periods when the index has actually risen, only to slump again within hours.

Markets across the world are being driven by the most fundamental of emotions: fear and greed. Rational methodology seems to have been left behind as investors struggle to interpret each piece of news as it emerges.

Such extremes affect us all in different ways. When markets really nosedived, I found myself in an almost disturbingly cheerful mood, which was caused only by thinking that such an occurrence made sense.

Conversely, the previous week, when markets rose sharply on the back of nothing more than a phone call between the German, French and Greek premiers, I felt very uneasy, because I could not see any justification for the market moving in the manner it did.

Friends are often sympathetic towards me during periods like this, assuming this must be a difficult time to be responsible for managing people’s money. On one hand they are right, but on the other I think I’m fortunate.

It is at the challenging times that investors need reassurance, or advice as to how best to weather the storms. If markets behaved at all rationally, then there would be little need for advice.

We live in an age of technology where access to information and knowledge has never been more accessible, so arguably people could manage their financial assets themselves. Many do, of course, but with varying degrees of success.

It is interesting to consider the views of investors, because it allows you to tap into their perception of what is happening. Right now, I know many are seriously considering heading for the door, or seeking refuge in cash.

This is understandable, but they then have to realise that they are accepting a negative real return on their capital, and also face the dilemma of when to return to risk assets.

There is absolutely no doubt that we live in extremely uncertain times and it is relatively easy to construct a case for believing that stock markets will fall from current levels in the coming months.

The unwinding of the eurozone and the enduring debt crisis would be just for starters. Add in the UK’s extremely anaemic economic growth projections and the lack of common purpose displayed by American politicians and you have grounds for pessimism.

However, it is possible to argue a case for markets rising and delivering surprisingly good returns. The printing of more paper money in major markets alone would cause indices to rise.

On balance, I think that the only justification for moving an entire portfolio to cash would be a belief that no other asset is capable of delivering a positive return. That to my mind would be an extremely pessimistic position to hold, however challenging markets might be.

But I would urge any investor to give serious thought as to the current positioning of their investments. It is essential that you review your current position and to question whether you are investing in the right areas. Diversification – which for me would include some cash weighting – is essential.

In many ways, I think right now is a time to be relatively defensive, but I would also acknowledge that it will become necessary to change that approach at some point in the coming year or so. In other words, there is a need to remain vigilant, and to become responsive to changes that might occur.

Markets seldom behave in precisely the manner we anticipate, or believe they should. The past two months alone have provided ample evidence of this, and it is likely this will continue for some time yet.

I urge investors to engage. The old adage of preparing for the worst and hoping for the best might not be wide of the mark.

• Ken Taylor is director of Mackenzie Taylor Wealth Management