Planning for a market downturn

As an investor, you understand that different asset classes and industry sectors are liable to turn against you from time to time. Despite equities' long-term potential, both the meltdown of the 'dot.com' boom and, more recently, the credit crunch fallout demonstrate things are much less certain in the short term. Similarly, bonds are viewed as medium to lower-risk investments, particularly when economic growth is on the wane. However, holders of some bonds over the period since the crunch first hit would have suffered. Many investors, faced with such downturns, tend to panic. They see only the shortterm loss on their portfolio balance sheet and forget their reasons for investing. Sadly, this is the worst thing they can do – and it is why planning at the outset of any investment is worth every minute spent. If you know why you are investing and understand fully the risks involved, market downturns should never have such an impact. If you are far-sighted and have a degree of nerve, they can even be an opportunity. Such downturns can be wide-ranging and indiscriminate, meaning the share prices of high-quality companies can suffer alongside lower-quality peers. This gives canny investors the opportunity to add to their portfolio at bargain prices. However, for most, the best strategy is simply to protect yourself while the market settles down. Nothing in a portfolio is more valuable than the time you spend achieving balance, diversification and cementing that long-term objective.

How to build your portfolio

The word 'portfolio' is simply a shorthand term for the collection of investments you own across all your accounts. Ideally this will be spread across a variety of assets - equities, bonds, property and cash - in a mix that has been determined by that your specific objectives. The process of deciding how much to invest in each asset class is known as asset allocation. For example, equities have traditionally offered higher returns over the long term but at the price of increased risk while, at the other end of the scale, cash has offered both security of capital and stability but with a fluctuating income and no chance of capital growth. Actual returns are dependant on many variables, such as the health of the economy in which you are invested, inflation, interest rates and market sentiment. The elements that impact each asset class vary and as a result, one asset might be doing very well at the exact same time another is doing badly. However, it is difficult to predict which one will be doing well - or badly - at any one time. Hence, if you mix the asset classes together and have a little bit of exposure to each, this can help balance out the peaks and troughs of the individuals. Your age, your financial position and your attitude to risk are all crucial considerations to make sure you get the proportions right and build the most appropriate portfolio. It is therefore helpful to speak to an expert who can more easily help you achieve the right mix.

So what does the budget mean for you?

A VERY brief summary of budgetary announcements made last week, and also a reminder of those already made that will take effect from 6th April:

- income tax personal allowances remain unchanged for 2010/11

- the National Insurance Lower Earnings Limit will be increased from £95 to £97

- a reminder that for those with adjusted net income over £100,000, their personal allowance will be reduced by £1 for every £2 over the limit

- a new tax rate of 50% will be applied on those earnings over £150,000

- for dividend income, the new tax rates will be 10%, 32.5% and 42.5%

- the ISA limit will increase to £10,200 from 6th April 2010, of which a maximum of £5,100 may be invested to a cash account

- from 6th April 2011 the higher rate of tax relief on pension contributions will be restricted for those with gross income over £150,000. Anti-forestalling rules apply in the interim

- consideration is being made for removing the dafault retirement age of 65, although no changes will come into place before April 2011

- inheritance tax thresholds will remain frozen at £325,000 until the end of tax year 2014/15, scrapping previously announced increases to the threshold

- first time buyers will pay no stamp duty on properties worth less than £250,000

- stamp duty on properties over £1,000,000 will increase from 4% to 5%

- to encourage greater financial inclusion, more people are to be given access to setting up bank accounts

- legislation is being introduced to provide for larger penalties for taxpayers failing to provide a full account of their income and capital gains relating to offshore investments

- capital gains tax will remain at 18%, with the annual exemption being frozen at £10,100 for 2010/11