February has continued much like January begun, with markets yo-yoing and investor sentiment swinging from one concern to the next. The FTSE 100 has even broken the 5,500 barrier – hitting a new low since July 2012.
Investors can’t be blamed for feeling unnerved. There is a cocktail of worries clouding the investment horizon from a slowing China, emerging market rout, the unprecedented collapse in the oil prices and more recently, the problems brewing in the banking sector.
So what can investors do? One: they can sit tight, transfixed like a rabbit-in-the-headlights watching as the market tumbles and decide to do nothing. Such inertia might not be the best option but it is certainly better than option two: sell everything and seek shelter in the perceived ‘safety’ of cash. Not only will they be selling low, breaking the cardinal rule of investing, but they will also be locking in their losses.
The final option is to take a page out of Warren Buffet’s book who said we should look at market fluctuations as our friend rather than our enemy; profiting from folly rather than participating in it.
Of course being greedy when others are fearful (another classic Buffetism) doesn’t mean indiscriminately buying everything. Look for investments with attractive growth and/or income prospects and strong competitive moats that can be scooped up at far more attractive prices.
Ultimately investing is a long term game, and when it comes to seeking out good quality investments nothing has fundamentally changed except that Mr Market is now asking you far less for an asset than he did a couple of weeks ago.
My three investment strategies for uncertain markets:
- Don’t be an investment sheep – go against the crowd
Contrarian investing is about doing the opposite of what most investors are doing. This means uncovering those instances where the market is either excessively negative towards a stock where an improvement is possible, or has failed to identify a change that is already underway.
It doesn’t take a rocket scientist to figure out which investments the crowd is currently shunning. Banks, supermarkets and oil and gas companies are particularly unloved. These are exactly the type of names seasoned contrarian investors like Alastair Mundy of the Investec UK Special Situations Fund and Alex Wright of the Fidelity Special Situations Fund and Fidelity Special Values Investment Trust, are tapping into.
- Diversify your holdings – try an alternative investment
One reason why many investors have a sense of credit crunch déjà vu is the fact that the sell-off in markets has been indiscriminate, with commodity prices, equities and credit conditions all moving in dangerous lockstep.
How do you ensure your portfolio is adequately diversified when all investments are heading in the same direction – south? Alternative assets can be a valuable source of diversification with returns far less correlated to broader equity markets.
Two good examples are gold and infrastructure. Gold funds on Fidelity’s Select List include the BlackRock Gold & General Fund and the Investec Global Gold Fund. Infrastructure meanwhile offers investors exposure to real assets with attractive income to boot. The First State Global Listed Infrastructure Fund invests in high-quality, infrastructure companies across the globe with defensive characteristics such as toll roads.
- Worried about capital losses?
A sensible way to mitigate volatility in markets is to invest in a balanced fund. These attempt to smooth returns by combining a range of defensive and growth-focused assets.
The Jupiter Distribution Fund, run by Alastair Gunn and Rhys Petheram, is explicitly designed for cautious investors who are seeking a monthly income but are also keen to avoid losing their capital. It could be a sensible choice for people approaching or in retirement. Jupiter Distribution typically holds around 60% of its assets in bonds and 30% in equities with the remainder in cash.
In uncertain times, wealth preservation should be your ultimately goal. The RIT Capital Partners investment trust-stated objective is to generate long-term capital growth while preserving its shareholders’ capital. Since 1988 it has delivered annual total return to shareholders of more than 12% a year.