Investment advice never more timely
q Given the recent downgrade of the US credit rating and the wild swings in markets in the past few days, what should investors do with their savings?
a Most advisers say they should stay put. Market swings are commonplace, and this one is no different, says Alwyn Owens, an independent financial adviser in Dubai.
While it might be tempting to sell holdings as stocks and bonds take a beating, such a strategy is not likely to put investors in good stead - especially if doing so deviates from long-term financial plans.
"The worst thing [investors] can do is pull out," Mr Owens says. "If they decide to pull out of investments, they will take a hit. All they need to do is sit down and weather the storm. They need to be calm. This is the nature of stocks. When markets go down quickly, they go up quickly."
Hameem Khizer, the chief consultant at Elfina Financial Investment Consultancy in Dubai, agrees making knee-jerk portfolio moves is probably not the wisest choice - if only because there are not that many attractive places to go.
"The American economy has taken a bit of a beating, but most of the other economies are not doing well, so it wouldn't be advisable for anyone to drop the dollar and pick up the euro, for example," he says.
But Vince Truong, a senior associate at Holborn Assets in Dubai, says the recent downswing does present an opportunity for savers to think about where they are and where they need to be.
Given all the uncertainty, he says investors should try to "de-risk" their portfolios where they can and come back to markets when things settle down.
That might mean getting out of riskier investments in such things as energy, property and technology stocks - but gradually, not all in one go. "There are so many risks in the short term and markets are being very emotional with movements based on headline news," he says. "I would start to de-risk my portfolio given that I cannot time it perfectly."
q What about people with cash to make new investments? Where are the best places to put money now?
a Opinions vary on that count, but advisers agree one strong bet is large, dividend-paying stocks in developed markets. The argument: the price of established blue-chip shares has declined considerably in the past few weeks, but many of these companies have clean balance sheets, plenty of free cash and pay regular cash dividends to shareholders.
As a result of the price declines, dividend yields have climbed, further strengthening the argument that now is a good time to get in.
"If you're looking at stocks, look at dividend-paying stocks - the big western blue-chip companies like the Marks and Spencers and the Tescos in the UK," Mr Owens says.
"Those are the kinds of companies to be investing in." Mr Truong agrees big dividend-paying stocks are a good idea, but he also advises looking further afield - and further into the future - by putting money in emerging-market bonds in currencies other than the dollar.
"To the degree that confidence is lower in the dollar, emerging market currency returns will be higher because of that," he says. Another factor in favour of such investments, he says, is yields stand to run higher in emerging markets, giving investors another way to profit.
Generally speaking, Mr Khizer says, it is a good time to make new investments for the simple reason investors profit by buying low and selling high, and prices are getting lower at the moment. At the same time, he says the watchword now should be caution.
"Don't go into anything that's risky and that sounds lucrative," he says. "Considering the volatile markets, that could up your risk."
q What about gold? The metal is hitting record highs, but is it at all an attractive commodity to invest in any more?
a Gold has become expensive, but many advisers expect its price to increase further as investors wary of US government debt seek even safer places to park their cash.
The metal is probably a decent short-term investment, but advisers warn it could easily take a big fall if the debt situation in the US and Europe inches toward a resolution and markets stabilise. "Once risk appetite is back on, gold will sell off," Mr Truong says.
"But longer-term I would still hold gold. The logic there is that the dent in confidence in the US dollar and US treasuries is going to be pretty permanent, and we may not see any meaningful solution until the next president [is elected].
To the degree the US dollar and US debt have issues, foreign governments are not going to buy as much of it."
These are troubled times in global markets. How can people keep their heads cool?
"You haven't lost a penny if you sit tight and you hang on," Mr Owens says. "But this is going to be a bumpy ride."
Published: August 9, 2011 04:00 AM