Thursday, 5 April 2012
After a couple of weeks of heady rises, which seductively suggest that all is well in the financial world again - and we prepare to invest our new ISA allocations - the market staggers then takes fright with a one-day fall of more than 2% in the FTSE.
How should the DIY Income Investor deal with this?
Well, perhaps the first lesson is: This is the way of the financial world.
Hard though it may seem, we need to raise our eyes from the red numbers of the daily stock market to the sunny uplands of the coming months and years. Back in 2008 this was easier said than done, although my portfolio has more than recovered since the Big Scare.
The second lesson is, of course: Am I sufficiently diversified?
Now, diversification is one of the key principles of the DIY Income Investor portfolio. But sometimes we stray from the straight and narrow. And if truth be told, I am overweight in financials. However, given that the whole world - including virtually all central banks and the IMF - are working to keep the financial system secure, then that is hopefully a reasonable risk. But I may be deluding myself...
Certainly, my growing allocation of fixed-return securities has cushioned the downturn in equities.
The third lesson is perhaps more subtle: I'm glad I'm not invested in trackers. A tracker fund that just follows the market index is pretty one-dimensional. I'm glad I can focus on the income - which is the same as it was the day before.
Finally, my fourth conclusion is: Who saw this coming? Any of these fund managers who are so, so keen to get their hands on your new ISA allocations?
I sort-of-know when a 'correction' is coming, because after a series of personal portfolio 'highs' there seems to be a period of lack of direction. Then zonk, the market takes fright of something or other.
So how does the DIY Income Investor deal with a market downturn? The answer is: sit tight, check you are sufficiently diversified, focus on your income and accept that this happens. A lot.
I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.