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Kirk Rice Blog

2021 Investing TipsWritten on January 21, 2021 by Kirk Rice LLP

2021 Investing Tips

Is the market collapsing and where should I invest?

As regular readers will know, I always say there are enough people out there who believe the market is a bubble ready to burst. Put them all together on social media, and they create an expectation in investors and market makers’ minds. Taken with other information if a fall in demand for assets shows prices must fall. However, markets might perform more like a balloon and deflate over a long period.

Look through the internet, and there is plenty of analysis about the 1999 dot.com bubble bursting and the three years of ‘depressed developed markets’. Before you let this all run away with your thoughts and perhaps buy all the gold bars and coins you can find and then literally sitting on it in your hastily built bunker in the woods, how would a rational investor cope?

The reality is that even after allowing for the volatility in stock markets over the long term, you will be able to make money investing in company shares.

In a simple model, you buy at low prices and sell at high. The reality is you cannot know a low or a high beforehand, so you need a hindsight time travelling machine, which as yet I have not found one. There are market indicators which may show the trend but can never be 100% reliable.

Investment managers have a set of disciplines they use to buy and sell. The simplest is to work out the price they would pay for a company and then only buy it when the market price matches that. In working out that price, they have formed a view on how much the company can grow its profits over the future period.  Sometimes these managers will have to wait several years to buy a particular share; of course, they reanalyse the company every year to ascertain the target price.

A manager will calculate the expected return from a company, and when the share price and dividends no longer match that outcome will sell the shares. They would normally expect to have another company share that does provide the target return to move the money to.

Another investment strategy is to look at where investors generally are putting their money and buy into that trend, not worrying how much they pay but expecting others to follow which will increase the share price. Having bought in the manager can then sell shares as the price goes up at a profit and move the money onto another trend. This type of investing is dominant in US Tech shares, especially, but also around the world.

The acronym FANGAM covers the main Tech shares listed in the US (Facebook, Apple, Nvidia, Google, Microsoft, Amazon, Netflix). If you invested in US shares and had just chosen these, you would have received stupendous growth. Now, these same shares are the cause of concern that a bubble has grown and will burst to leave investors with very little value.

This is not 1999 though. Investors cannot move money into cash and earn anything there. Governments are continuing to coordinate fiscal and monetary policies for stability and to keep money flowing into companies and their activities.

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Blue-chip shares refer to the high value companies that pay out dividends over time and have steady earnings through good and bad times. They become seen as relatively low risk. Surely the FANGAMs meet that definition.

Of course, that does not guarantee they will not fail as there have been some blue-chip casualties to fraud and poor decision making.

Disciplines that investors should adopt: Diversification of companies held by their activities; where they make profits; how much debt they have; attitudes to environmental and social issues.

Decide how much of your money is to be invested in each category you wish to monitor. Then analyse the companies to decide which to invest in. Set a price to sell the shares at and stick to it. Know which shares you will move money to and why. Keep repeating the process.

Do not use money to invest that you know you need to spend on something else in the near future. Just think about telling your family that you cannot move house; buy a car, support school or university costs because your money is tied up waiting for your investment strategy to run its course.

Inflation is low and could easily rise as consumer demand engulfs the economy after the pandemic. If that happens, you need to invest now in companies that you think will benefit.

Investors that have fared well over the longer term have been those that spread the money across sectors and the globe and been able to leave it for many years with discipline to leave well alone.

A successful multi-asset investment portfolio uses a global asset allocation and diversification model regularly reviewed and adjustments made without short term reactionary changes.

As always, we recommend you consider independent financial advice to assist you when considering income investment options.

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Any reader interested in getting some help with 2021 Investing, should email info@kirkrice.co.uk to arrange a call with one of our financial planners.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The information is based on current tax legislation which may change in future. The FCA does not regulate tax and trust advice.

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