Terrorism and the stock market

Q European stockmarkets seem to be declining as a result of the recent tragic events in Madrid. What can investors expect if these terrorist attacks keep happening ? Although I invest in stocks and shares for the long-term, I am worried that I will lose money. Should I sell and move back into cash deposits?

A The terrible events of last week are a horrible reminder that terrorism very much remains and, like in all such acts, scare investors into panic selling. The September 11 tragedy was evidence of this where world stockmarkets plummeted overnight as the fear of further terrorist attacks swept across America and other western economies.

It is therefore only natural for investors to feel very nervous about any stockmarket investments they hold as the natural instinct is to want to sell when there is such terrible news. Panic selling therefore pulls share prices down.

The effect of the Madrid bombings was for European stockmarkets to lose about two to three per cent of their value on the day of the bombings. They did lose some further ground before recovering (at time of writing).

So long as there are no repercussions then I would expect the markets to settle down again. On the other hand if there are any further terrorist 'threats or attacks' then this could cause a severe downward movement in share prices generally.

It is always essential therefore to have a good spread of investments. It is never wise to invest solely in one type of asset but you should always have a good mixture of cash, bonds, equities and property.

How much you allocate to each asset class will differ between investors and this is where you should seek proper financial advice. I witness all too often, people that invest all available wealth in say bonds only or stocks and shares only. Diversification is the key to every successful portfolio.

You acknowledge that your stocks and shares are long-term. I would encourage you therefore to maintain this mindset and remain focused on the long-term. I doubt that you invested to try and time the market or to make a 'quick profit' which is why you should also look to stocks and shares for the longer term. It is statistically proven time and time again that the returns from traditional stockmarkets such as the US and UK have outperformed the other asset classes, i.e. cash, bonds and property over the longer term.

In summary, I would not advise you to sell any stocks you hold out of fear. If you invested for the long term then you should remain invested. You may however wish to review your holdings as some stocks actually perform better in troubled/volatile periods. At the same time ensure your portfolio is adequately diversified across different sectors and countries.

Mark Hollingsworth is the director of Hollingsworth International Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 (office hours) or e-mail mh@hollingsworth-int.com.

Past performance is no guide to the future and, except where amounts are guaranteed, the price of your investments (and the currency in which it is denominated) may fall as well as rise. Malta exchange control regulations must be observed. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.