Share Dealing ISA Q&A

Eddy Reynolds, Head of Investments at Lloyds TSB Wealth Management, who is responsible for portfolios worth close to £8bn, answers some of your questions.

Why invest in equity based products at the moment?
At the moment the equity market offers good value for investors who are prepared to accept the current volatility and can take a longer term view. Currently the valuation of the market looks cheap by historical comparisons. The prospective PE ratio of the market is currently 8 to 9 times earnings compare this to 1999/2000 when the PE ratio was around 17 to 18 times earnings.

So does keeping my money in cash make sense?
Historically, during a downturn holding cash has typically been a sensible and defensive strategy, although with interest rates now at 1% investors are receiving hardly any reward for saving and there is a distinct possibility that inflation will erode the purchasing power of their capital. It may be a good time to review how your portfolio (including cash and investments) is positioned and make good use of the opportunities that are out there.

Sounds like you believe there are ways to get more from your money. Have you any recommendations?
Yes, there are always opportunities out there but you need to mindful of the risks.  In today’s volatile market conditions, managing your finances wisely is likely to be one of your major priorities. Assessing your portfolio and considering changes can be a time consuming and confusing business although it can be made easier by following a few general rules:

• Do not put all your eggs in one basket. Prudent investors look to diversify the risk of holding a single asset, or a few investments, by ensuring that they have a range of securities that allows them to smooth out the stock market peaks and troughs. This can be achieved easily with collective funds.
• Diversify through asset classes as well as through your selection of securities. A balance of assets covering shares and fixed interest investments such as gilts and corporate bonds that pay interest at regular intervals, which will help reduce overall stock market volatility. 

That’s interesting. So what should investors be aware of when reviewing these fixed interest investments?
Gilts have benefited from the flight to quality and gilt prices may offer little extra reward now over cash based deposits. With UK Base rates now at record lows, alternative income generating assets are becoming sought after and yields on Corporate Bond funds are historically high. These investments are not as safe as cash based deposits although they are generally safer than investing in company shares. 

Are there any other strategies we should consider?
Sterling has been weak recently and assets held overseas would have gained in value. Collective funds invested outside the UK provide exposure to industries and businesses that are not found in the UK, which can further increase diversification at the same time as offering wider investment opportunities. Of course, currency fluctuations can add to volatility, so you need to make your choice carefully and be mindful of the exchange rates between the UK and any countries you might want to invest in.

You’ve given us a lot to think about any final tips you can offer?
Making a switch, and timing it, can be difficult. Timing a change in your portfolio can make a significant difference to its characteristics. Everyone is familiar with the phrase 'past performance is not a guide to future performance' but it is worth noting that historically the first year after the end of a recession has delivered returns in the region of 25% with over half of that coming in the first three months.

The comments set out above are for general purposes only and should not be taken as advice or specific recommendations. If you need any assistance with your investment decisions, you should consult an independent financial adviser.

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