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How do you preserve capital in a market downturn?

This is a good question to ask oneself either in a sustained bull run or during a market correction. MASECO is not suggesting there is a market downturn on the horizon but this question is at the forefront of a lot of investors’ minds.

Corrections in world stock markets are usually led by economic, financial or geopolitical events. Last week the downward movement in major indices was caused by fear of inflation (an economic reason), but that is not to say that this fear will be the cause of an extended negative performance across relevant asset classes, it is just today’s concern. It could be a geopolitical event that gives investors pause for thought on valuations in the equity and bond markets; think North Korea versus the United States and the “big button” bravado. Equally it may be neither economic nor geopolitical outcomes that upset the current benign investor experience but could instead be financial, such as the sequence of events that caused market drops around the world in 2008.

Whatever triggers the next period of negative performance in markets one thing is certain: forecasting the event, its timing and nature, will be tough. How the crisis evolves and how assets behave adds a further layer of uncertainty. Only last year we had a stand-out example of misinterpretation of an event: Brexit. The timing was easy as the referendum date was set, a small minority predicted the result but hardly anyone got the outcome right – UK government bonds and UK equities rallied sharply.

One should aim to be pragmatic rather than pre-emptive as predicting the future is impossible. The best protection advice for a market downturn is to hold mainly liquid investments in a portfolio that is designed with your risk tolerance and capacity for loss in mind. If some of your investments are not liquid then ensure these are not correlated to mainstream equities and bonds. Remain highly diversified by asset class and geography, there will be areas of the investment world that will hold strong in difficult times. Consider adding ingredients to your portfolio that can take advantage of falling stock markets. But the most important point of all is to remember that when the markets fall, bonds and stocks are cheaper so you should buy more if possible as the expected return going forward will be higher.

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Risk Warnings and Important Information

The value of investments can fall as well as rise.  You may not get back what you invest. Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.

The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.

MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice.  MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.


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