Investments in property usually perform well, but, along with shares, the market has seen values fall

QUESTION: Current investments seem to be on a continual downward trend. What things should I be considering with my current investment portfolio?

ANSWER: As you correctly point out, things are on a downward trend at the minute. The stock markets around most of the world have been falling, property prices both here and further afield have been cut, and even the banks and building societies have been reducing the interest rates that increased substantially in light of the credit crunch.

As in any state of turmoil, it’s easy to take short term decisions that do not necessarily make long term common sense. What we are going through has happened before and will no doubt happen again at some point in the future. The difference this time, if there is a marked difference, is that asset classes are usually thought to be non-correlated.

By that I mean assets such as property tend to operate differently to shares, for example when the stock market isn’t performing well, people look to other assets such as property and as a result, investments in this area tend to perform well. This time around, however, shares and property have become correlated and have both suffered falls in value at the same time.

This has probably been as a result of property being treated more as an equity investment looking to achieve capital growth, rather than for its long term income stream.

However, this does not mean that investors looking to move their investments into cash should be left guessing when is the right time to move back into the other asset classes. With inflation rising to near 4%, higher rate taxpayers will need to achieve an interest rate of almost 7% just to ensure that their capital is not eroded in real terms.

So the best approach is to ensure that any investment portfolio has a good mix of equities, cash, property, bonds and alternative investments. This is known as asset allocation.

The amount that should be allocated to each asset will depend upon the reason for the investment and an individual’s attitude to risk.

Generally the longer the period the investment has to run, the greater the level of risk an individual should be able to take.

Similarly, if all the investment is not required at a fixed point in time, such as paying for university fees, then once again the capacity to accept risk should increase.

Having considered an asset allocation that is appropriate to your risk profile and financial objectives, you should then consider how you participate in each of the asset classes.

For example, allocating the appropriate amount into equities leaves you with a number of decisions.

Do you, for example, have a geographical bent towards a certain area, maybe America, or do you go for something more speculative such as an emerging economy?

Again, many of these decisions will be driven by your attitude to risk. If the former geographical area is chosen, it may contain a higher element of risk due to political uncertainty or currency fluctuations.

Similarly you need to decide whether the portfolio should be invested in blue chip companies with a long established track record, or at the other end, smaller companies that are new to the market.

Having made these decisions it is vital that good fund managers are chosen, who run funds with a good track record, and are experienced enough to deal with the current investment climate that we are living in.

As with all financial decisions, you should look to engage the services of a reputable financial adviser who will help and guide you through many of these issues.

Raymond Mulligan is managing director of Johnston Campbell, a company of independent financial advisers regulated by the Financial Services Authority. For further information, please contact raymondm@johnstoncampbell.com or (028) 9022-1010.