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Bet on stock market recovery?

Investment | Trackers Helpful? 4

Asked by kane1926, submitted 10 August 2011.

Open Quote Like most poeple my funds have lost money at present, as the index is down I was thinking of getting a tracker fund which will hopefully go up when the index improves. Do you think this is a good idea, and if so could you suggest a fund. I normally go through Hargreaves Landsdown.End Quote

Answered by Justin on 18 August 2011

It's very difficult gauging when stock markets will stabilise and subsequently rise (so that we all start making some money again!). My concern is that the root causes - worries over debt and sluggish economies - won't vanish overnight and could be here to stay for several years.

By all means consider betting on a recovery, but just be prepared for lots more volatility over coming months and potentially well into next year and beyond. I think you'll probably be fine if you can invest for 5-10 years and, of course, there's always the chance you'll turn a decent profit far more quickly. But, as you can probably tell, I'd be inclined to err on the side of caution.

Trackers would be a cost effective way to bet on a recovery, just bear in mind that around 20% of the FTSE 100 is accounted for by the oil/gas sector and about the same again by financials, so big movements in these sectors will have a large impact on the index. Given financial stocks have borne the brunt of recent falls this may be no bad thing when markets do pick up.

Alternatively, you could consider investing in an aggressively run actively managed fund on the basis they've probably been harder hit by the recent downturn hence may have more upside during recovery - albeit this is obviously a higher risk route and you may well hold such funds already.

Or, if you'd rather be more cautious, consider high yielding equity income funds. You might not benefit as fully from any upturn (versus the index or more aggressive growth funds), but the dividends and nature of the underlying investments (probably fairly dull cash rich companies) might help better weather any shorter term storms.

While Hargreaves Lansdown have their merits they don't cater that well for trackers, because most trackers don't pay trail commission meaning HL will charge you 0.5% a year (capped at £200). Nevertheless, according to their website you can invest in HSBC trackers (which charge 0.25% a year) without having to stump up the extra 0.5%, so this could prove a viable option.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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Readers' Comments (4) - To post a comment please register or login .

Comment by kane1926 at 12:01pm on 19 Aug 2011:

As usual very helpfull. Thank You

Comment by winger14 at 2:12pm on 20 Aug 2011:

What about corporate bonds ? with interest rates looking like they are now going to remain low for the next 6 - 12 months - would it be worth investing in these as a more stable alternative to the stock market, that would also provide a better yield than savings accounts; and trading out when interest rates look like they are going to go up ?

Comment by whiskyjack at 7:53pm on 22 Aug 2011:

Just a question..... why go into a tracker fund, when ETF's do essentially the same job, and less cost and you can use stop losses or simply trade by the minute if things go the wrong way?

Comment by justin at 9:35am on 23 Aug 2011:

In this context simply because Hargreaves Lansdown would charge dealing fees and 0.5% a year to hold an ETF within a Vantage ISA/SIPP. If you use a cheaper stock broker who doesn't charge annual fees then an ETF can be a very sensible route, subject to understanding the risks I've covered in this earlier article.