It’s the early evening, and the BBC News has been full of Covid-19, the US presidential election and Brexit.
When you have had enough of the news, the presenter casually announces that the FTSE 100 has fallen by 106 points and wiped £50bn off the price of shares.
They rarely announce that the FTSE 100 has risen 106 points and “wiped on” £50bn to share prices.
This news adds further gloom to an already gloomy day. As they say in journalism, if it bleeds, it leads.
But should the rolling news channels care when the index rises? What does it even mean?
And how does it impact on the investment portfolio or pension fund that Informed Choice looks after for you?
First of all, the FTSE 100 is shorthand for the Financial Times Stock Exchange top 100 companies measured by market capitalisation.
It is an index that each day measures the market capitalisation of those companies, based on their latest share price.
Each day, the prices of those shares will go up or down (sometimes they stay the same) based on how well those companies are doing, what’s happening in the economy and in the world at large, and investor sentiment.
But the FTSE 100 is a blunt instrument for measuring the way your investments and pensions are doing.
Rarely, if ever, is someone’s ISA or Pension plan entirely invested in shares in companies that make up the FTSE 100.
More likely, and very likely with an Informed Choice managed portfolio, your money will be in a much more comprehensive set of investment assets.
For example, you are likely to have some invested in US shares, European shares, Japanese shares, Emerging Markets shares, fixed-interest securities, commercial property and cash.
In other words, you will be invested in a diverse portfolio both in terms of assets and geography.
It’s like our parents taught us as we grew up: “Don’t keep all your eggs in one basket” It’s just we use a more sophisticated word to describe that concept – diversification!
When in March 2020 the US and UK stock markets fell sharply as the economies contracted in respect of the Covid19 pandemic, you could be forgiven for thinking that the same thing happened to your investment or pension portfolio.
The Dow Jones Industrial Average (a US Index) fell roughly 26% in the space of four trading days.
In the UK, in the three months to the end of March 2020, the index of UK company shares fell by 25%
It all sounds doom and gloom.
And yet each week when we measure the performance of our three principal model portfolios, which we call Cautious, Moderate and Aggressive. We see little of this doom and gloom.
What we see instead is pretty much similar values today compared with those a year ago.
That is not to say that these portfolios went down in value at certain times, they did of course, but that staying invested meant our clients did not “lose money”.
Losing money only happens when you cash in investments after their value has fallen.
We have been using our investment proposition since 2004.
Over time, we have changed the asset class mix and the underlying funds we use to generate returns. Still, we have always stuck with our investment philosophy, transparency and simplicity, along with diversification using the main investment asset classes.
So, when you hear the BBC news report a fall in the FTSE 100, remember it only applies to a bit of your money, not all of it!
