Brave enough to buy now?

By Derek Baty

Last updated 23:17, Monday, 20 October 2008

As I write this article the FTSE-100 has fallen by about 31 per cent since the start of 2008. Banks are going bust and turning to the Government for help, governments in Europe, UK and USA are co-ordinating surprise interest rate cuts and injecting billions into the financial system without, it would seem, any effect.

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Fancy a flutter? Contrarian investors believe the greatest profits are to be made by going against the conventional wisdom. In other words the best time to buy an investment is when everyone else is selling

The ‘financial crisis’ dominates the newspapers and receives 24-hour coverage on TV news channels. Should we all withdraw our cash from the banks because we don’t trust them to look after our money any more, or think they will go bust tomorrow and stash the cash under the mattress?

I don’t think we need to go that far. I’m sure that most readers will now be aware that the Financial Services Compensation Scheme (FSCS) provides financial protection should a bank be unable to honour its obligations and it would seem that if the Government is willing to bail out UK depositors of Icelandic banks then, even if they won’t give a cast-iron guarantee, it seems unlikely they will let a UK bank fail.

So everything is doomed – the stock market is falling, banks aren’t safe anymore, we might as well all stop saving for the future, cash in our investments and freeze our pension contributions!

Contrarian investors believe that the greatest profits are to be made by going against the conventional wisdom. In other words the best time to sell an investment is when everyone else is buying, and the best time to buy is when everyone else is selling.

So if you are brave, now might be a great opportunity to profit from the falls in equity values.

Buying into the FTSE-100 now is 31 per cent cheaper than it was at the start of the year, although it may get cheaper yet.

Anthony Bolton, one of the UK’s most successful fund managers and a contrarian investor, said in a recent interview with Investment Week: “Conditions are starting to be there for a bottom to be made.” He also told the BBC’s Today programme: “I have bought shares in the last couple of weeks for the first time for some time... I see a lot of value in certain areas.”

Anthony Bolton may be braver than the average investor and certainly more experienced but should you follow his lead?

In March I wrote an article on the benefits of phased investing – these are perhaps even more relevant now.

Ideally, when investing we would buy when the price is lowest and sell at the peak, but because no-one knows when that will be, phasing or drip-feeding your investment averages out the ups and downs and you benefit from pound-cost averaging.

So if you are as brave as Mr Bolton, go for it, otherwise consider phasing.

As always, my advice would be to talk to an independent financial adviser, discuss your attitude to risk and put in place a plan that matches your needs and objectives.

If history is anything to go by, equity markets will recover and the only way to benefit from any recovery is to be invested when it happens.