Top questions by investors

12 September 2012
Tom Stevenson

One year into the European debt crisis, markets continue to be volatile, creating much uncertainty for investors. Here are some of the top commonly asked questions posed by investors around the region to their financial advisers.

How does the situation in Europe affect investments?
If you were to try to list reasons why stock markets have risen so much over the past three months, a reduction in worries about the euro zone crisis would be right up there. It is not that the sovereign debt crisis has gone away - far from it - but investors have stopped fearing the worst.

To an increasing extent, the likely outcomes have been priced into markets. Europe matters a great deal but it is not the only driver of investment markets though, at times, it has been.

What will happen if Greece falls out of the euro?
Despite what I have just said about the euro zone crisis, if Greece does fall out of the euro, markets will most likely react badly in the short-term and the event itself will be a significant shock to investor sentiment.

Greece is undoubtedly struggling to find the spending cuts that it has signed up to and it has asked for more time to get its books balanced. That might make an exit from the euro sound more likely, but I think the fact that the current grown-up conversation being had about exactly how Greece can get back on an even keel makes it more likely that it will actually stay inside the single currency.

How can I reduce the risk in my portfolio while still achieving my goals?
There's a simple answer: Diversification. None of us can know what lies around the corner and that means that putting all of our eggs in one basket - geographically or between asset classes - is never a good idea.

Having a multi-asset portfolio spread between all regions of the world means you may never shoot the lights out performance-wise but you will avoid catastrophe. And that, coupled with a realistic programme of regular saving, is the best way of hitting your goals.

Should I stay in cash, and how much money should I keep there?
A little bit of cash in a portfolio is always a good idea because it gives you the opportunity to take advantage of market falls. But, that said, too cautious an approach will doom you to watching the real purchasing power of your money eroded by even quite modest rates of inflation.

In the long run, equities and bonds have outperformed cash and I would be amazed if, in future, they did not continue to do so.

What is the right mix of growth and defensive assets in this environment?
Just as a decent mix of assets and geographical exposures makes sense, so too does a combination of growth and value investments, cyclical and defensive assets. Markets can change mood very quickly, as we have seen in the past three months. Being on the sidelines because you felt nervous about the outlook would have been a very expensive mistake in recent weeks.

However, with so many headwinds for the global economy, an overly aggressive stance would also be risky in my opinion.

Should I stay in shares?
Yes, I would definitely stay in shares for the reasons I've already given. But not exclusively so and the proportion you should hold in the various asset classes will depend on a number of factors, not least your age.

The longer you have to invest, the greater should be your exposure to shares, which offer greater potential returns but also the greater likelihood of short-term fluctuations.

And don't forget that retirement age is not the end of the line - with many people these days facing the prospect of a long retirement, having some exposure to income-producing shares even after you stop work can make sense.

Should I reduce my holdings of growth investments?
The past 30 years or so have been a period in which investors have tended to focus on growth investments where returns have been largely driven by capital appreciation. In the great bull market from 1982 to 2000, investors were pretty indifferent to the income offered by most investments, but I think that has changed for the foreseeable future.

In the long run, income has actually provided the lion's share of the total return from most investments and I expect that to continue to be the case. Income-generating investments have many things to commend them over pure growth-oriented investments.

Will the market recover to its 2007 levels?
Depending on the market you are talking about, we are getting back to those levels already. In time, I am sure the answer is "yes" because companies are in pretty good shape and valuations are relatively cheap compared to history.

Recoveries from bear markets can take a long time but the long-term trend of the market throughout all the turmoil of the 20th century was upwards. No one can predict the future but it would be a very bold call to say that the current century would be any different.

Tom Stevenson is the Investment Director of Fidelity Worldwide Investment.