Investors have weathered difficult times in the last five years as a result of the turmoil in international financial markets and 2013 will be no different, even if it seems that the worst may be over.
Risk and return are sides of the same coin- John Cassar White
Most analysts agree that in 2012 the bonds market showed price gains that can safely be described as impressive. The equities markets showed similar resilience even if few would bet that this is a sure beginning of a bull market. The biggest losers in 2012 were those cautious investors who left their hard-earned funds in low-interest bank accounts that hardly covered the rate of inflation.
Perhaps even more unfortunate were those who in the past few years were victims of mis-selling by a few of our financial services providers who seem to be getting away with murder. They are doing a disservice to the industry that up to now enjoyed a high degree of respect among investors. One just fails to understand how the regulators are tolerating this disregard of financial consumers’ rights.
As interest rates are likely to remain at record low levels for at least the next three years, many small investors are desperately looking for safe investment instruments that will give them a decent return for their money. Bank accounts of whatever type are unlikely to delivery such returns. I am concerned about the high interest rates being paid by one or two local operators that are unsustainable unless these financial operators are investing their customers’ funds in high risk assets.
It is unlikely that the bond market will continue to show significant gains in 2013. Many investment analysts are fretting that a ‘bond bubble’ may have already been inflating and we all know how bubbles can suddenly burst. It is amazing how non-investment grade bonds, or junk bonds as they are more popularly known, have appreciated at a time when many corporate issuers of these bonds are still struggling to register decent profits in one of the longest economic slumps in the last century.
One would do well to keep in mind that risk and return are sides of the same coin and taking big risks with unreliable bond issuers could seriously hurt one’s pocket.
Many analysts are arguing that 2013 will be the year of growth for equities even if they are qualifying their predictions with a number of conditions. Admittedly, many equity markets now seem to be priced far more reasonably than they were in 2008. But growth in the US and especially in the euro area is by no means certain.
The problems for the common currency persist, and unless EU leaders stop pretending that their gradualist approach will bring about the necessary reforms to underpin the fundamentals of the euro, we could well face another bout of uncertainty that will shake equity markets.
Emerging markets are also favoured by some analysts. China is once again bouncing back, even if its ultimate growth depends on the ability of countries which import Chinese goods to recover economically and boost their consumers’ demand.
Some basic principles must never be ignored by potential investors. One of these is that one should aim to spread the risk by having as many different holdings in equities or bonds as possible. An ideal instrument that achieves this aim is that of electronic traded funds. These funds track indices and they are generally low-cost and give an opportunity to small investors to spread their risks.
The low interest rate scenario that has persisted for quite a few years has brought about another concern for small investors – that of high bank charges for buying, holding and selling investments.
The Financial Services Authority in the UK has introduced some changes which will ensure investors get independent advice from financial service consultants who will charge a fee. It is estimated the fees for such a service could range between £50 and £250 for the typical small investor.
Many consumer protection analysts fear that these fees may entice small, inexperienced investors to adopt a do-it-yourself strategy when deciding where to invest their money. This is a reasonable concern as most so-called investment consultants just push those instruments that earn them the higher commissions.
Small investors need to understand the element of risk that is linked to certain financial investments. They would do well to keep themselves abreast of market developments and seek help form trusted operators.
johncasarwhite@yahoo.com