Is anything safe?
PUBLISHED: 09:50 27 April 2009 | UPDATED: 15:58 20 February 2013
Should shareholders sell during a period of economic uncertainty and, if so, where will your money be safe? Kent Life asks the experts
In times of economic turmoil and stockmarket weakness, it is natural for investors to worry about their shareholdings. Those who have held a well-spread portfolio of investments for a number of years are probably less prone to sleepless nights, because they will have experienced market cycles before and, so far, the bad times have always been followed by recovery.
This has been the case for many years but, since the FTSE All Share Index hit a new high in early 2007 and continued to rise further until that June, the All Share Index has fallen back by nearly 50 per cent.
Shareholders could be forgiven for feeling not only battered and bruised but distinctly nervous about being wiped out completely and some have thought about taking their money out of the market. But when you sell your shares, what do you do with the money? Where will it be safe? In the past, clients who were too nervous to stay in shares would just put their money in the bank until such time as they felt brave enough to buy back in.
Cast your mind back to July 2007 when, just two months after Northern Rock declared the outlook for the business was "very positive", its directors had been granted emergency financial support from the Bank of England and depositors were queuing up to take their money out.
This was just the first sign of the banking crisis in the UK and since then there has been considerable nervousness among those lucky enough to have savings.
Our wealth management team has many years of investment experience between us, but we have never before been asked whether it was safe to put money into major high street banks.
A new worry has now emerged for savers, particularly those who rely on the interest from their accounts to provide some or all of their income. Since it peaked at 5.75 per cent in July, base rate has been slashed, at the time of writing, to 0.5 per cent.
Savers not locked into a fixed-rate deal will find their income is being reduced to a fraction of the level a few months ago. This dilemma for savers may be one of the factors that should lead eventually to a sustained recovery in the equity market. At the moment, the average yield on the shares which make up the All Share Index is 5.6 per cent, a much better rate of return than you can get on most deposit accounts.
Of course, you are putting your capital at risk by buying shares and it is always possible that companies will cut their dividends. However, the average dividend cover on this list of shares is around 2.34 times, which means companies are achieving an amount of profit per share nearly two and a half times greater than the amount they are paying out.
In the present economic climate, some companies will cut their dividends, and some have already done so; do look carefully at the likelihood of this before investing. In normal times, dividends often increase faster than inflation but this may not be the norm again for some time.
John Kennett, investment manager
John is an expert in the discretionary management of the portfolios of private individuals, pension schemes and trusts. During his 30 years in the City, he managed investments both in the UK and overseas. He was a member of the London Stock Exchange for 20 years and formerly a director of Capel-Cure Myers and an Associate Director of Newton Investment Management.