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Risk and return #investments

risk and return

It was another worrying week on the stock exchange as more news from Europe and China had a negative effect. The slowdown in China is because we are buying less of their exports and austerity here means we can’t afford to buy more. The economic system isn’t allowing nations to trade.

Part of the problem is that China doesn’t allow many imports and turns a blind eye to copyright infringement. Investors aren’t really encouraged in the west, people are encouraged to be consumers, not investors.

Risk

If investors are to continue to invest and risk money, the returns need to be higher or the risk more limited.

Traders in the City of London are still nervous after the credit crunch of 2007 and that sentiment makes for a volatile market. This can be good for some day traders, but not for long term private investors.

Even with a fairly diverse portfolio, I have made losses this week, at least on paper. I think the market will improve as people do have a tendency to think positive. Sentiment can change very quickly, as risk appears to be less.

The bright spot on the horizon is the Zurich takeover of RSA insurance. RSA is 505 at the time of writing, but if the takeover goes ahead I think 550 will be the price. There are even rumours of another interested party, but I think that is unlikely.

Some companies have been hit particularly hard just lately and they are the ones who bring commodities to the market. Oil companies and miners have been hit and we have to consider how long oil prices will stay low. The adoption of fracking in some countries has brought down prices and the slowdown in the world economy too. This could lead to mergers and less competition; exploration for oil could also be hit. I’m very hopeful as Solo Oil transforms from a explorer to producer; it could bring me a nice windfall as the share price soars.

I am prepared to accept lower returns on investments if inflation continues to be low. It seems at the moment that much of the money being invested is going into the property market and that seems like a bubble that must eventually burst. A shortage of homes, especially in the south east of England combined with a surplus of jobs compared to the rest of the country has seen the south east become disproportionately more prosperous compared to the rest of the UK.

The London market is down around 1.5% today and so some investors who picked up cheap shares a couple of weeks ago are now selling. This short term profit might be good, but private investors think long term. British companies need less risk and more long term support too.

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