Investing When Markets Are Low – A New ‘Structure’?

After two years of watching the FTSE climb and climb (reaching an eye-watering high of 7778.64 at the beginning of the year!), January saw the dip in the markets that we had all been waiting for. Whilst the pragmatists amongst us ‘predicted’ that this was going happen, what none of us can say for sure, however, is whether this is a temporary blip, or a full-scale market correction…

As our clients will know, we recommend that a long-term view is taken when making investments. Individuals must be both comfortable with the inevitable ups and downs of the markets and have the capacity (both emotionally and financially) to accept these short-term fluctuations. But where does that leave individuals who want to protect their capital? Is the only choice just to grin and bare sub 2% interest rates currently available on cash deposits?

‘Structured products’ can offer a ‘halfway house’ for clients who want some exposure to the potential fortunes of the markets but are uncomfortable with loss of capital. This type of investment can offer full, or partial, protection of your original investment whilst offering a return linked to the performance of a particular market index (commonly, the FTSE 100).

Like fixed rate deposits, the level of return available on these types of investment is prescribed at outset, however, the returns quoted are usually greater than those available on cash deposits over similar terms, given the exposure to the underlying market index.

Considering this, and adding in the additional benefit of capital-protection, why are we all not investing in structured products?

A key risk of structured products is that the delivery of the quoted return depends on the underlying market index meeting certain criteria. For example, certain structured products may require, say, the FTSE 100 to be higher at the point the structured product comes to an end than it was when you originally put your money in, in order to produce a return.

If (in this example), at the end of the product term, the FTSE 100 is lower, you would therefore only receive back the money you put in (or a percentage of that amount, where the structured product only offers partial-capital protection) with no return on your investment. Clearly, this is less favourable than if you had held your money in a cash deposit, where you could have received some interest, albeit nominal, on your cash.

So, when is the ‘best time’ to invest in structured products? Well, as I say to clients, if I knew the answer to that I would be sat on a beach in the Maldives on my fourth piña colada; not writing this article from our Preston office on my fourth cup of coffee…

Timing the markets is near impossible and, whilst there is an argument to say investing in structured products whilst the markets are ‘low’ gives a better chance of the product producing its quoted return… how ‘low’ is ‘low’? There is no way to predict whether the last three months of falling FTSE levels is just a speed bump on the road to even more record highs, or if we are at the top of a pretty steep hill about to roll into descent.

Ultimately the decision to invest in structured products depends on your circumstances, attitude to risk, as well as your financial and psychological capacity for loss, and we encourage a discussion with your financial adviser to determine whether this type of investment is right for you.

If you would like to discuss this blog in more detail, or you would like to speak with a member of our team, please contact Katy Allen or call 01772 821021 to be put in contact with a member of our Financial Planning team.

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