I write this as markets pause for breath in the wake of their collapse in the dog days of August. I hold shares, which my IFA manages, and which he liquidates (i.e. converts to cash) if necessary. But he hasn’t done so and I’m not perturbed. The main reason is that I have sufficient cash reserves to ride out any short term fluctuations because I took some cash out in March 2015. My thinking was twofold:
- If there was a hung Parliament and Labour took a role, which you may recall was the expected outcome, then markets would tumble as investors fled an inept government.
- The markets were highly valued according to the rule of 20 (see page 242). The P/E ratio of the FTSE was about 17 and the dividend yield was over 2%, so the magic figure of 20 was close.
So I’m not surprised that they have come down. The cumulative performance from my IFA is still 6% p.a. after inflation even at these low levels, and whilst rises are rarely as quick as falls, it seems inevitable that values will rise over the next year or two. By keeping enough cash for a year or two the gyrations of the markets won’t directly impact my financial position.